
COPYRIGHT DEPOSIT 



ELEMENTS 



ARTHUR LATHAM PERRY, 
»* 

OKKIN SAGE PEOI'ESSOR OF IIISTOEY AND POLITICAL ECONOMY IN 

WILLIAJIS COLLEGE. 



Quid pro quo. 



ELEVENTH EDITION, REVISED AND ENLARGED. 



/%p%$l_^J 



NEW YORK: 
SCRIBNER, ARMSTRONG, AND CO. 

1874. 




Entered, according to Act of Congress, in the year 187S, by 

Arihub L. Peret, 

in the Office of the Librarian of Congress, at Washington. 



RIVERSIDE, CAMBRIDGE : 

STEREOTYPED AND PRINTED BY 

H. 0. HOUGHTON AND COMPANY. 



To 

MY ONLY BEOTHER, 
BAXTER EDWARDS PERRY, Esq., 

OF BOSTON, 
WHOSE FAITHFULNESS TO HIS CLIENTS IS ONLY SURPASSED BT 
HIS KINDNESS OF HEART, 
IS 

FRATERNALLY INSCRIBED. 



TABLE OF CONTENTS. 



-•- 



CHAPTER I. 

PAGE 

On the History op the Science 1 



CHAPTER II. 
On the Field op the Science 42 

CHAPTER III. 
On Value 56 

CHAPTER IV. 
On Exchange 103 

CHAPTER V. 
On Production 118 

CHAPTER VI. 
On Laeob . 134 

CHAPTER VII. 
On Capital ICS 



VI CONTENTS. 

CHAPTER VIII. 

PAGE 

On Land ........... 188 

CHAPTER IX. 
On Cost or Psoduction 210 

CHAPTER X. 
On Monet ........... 229 

CHAPTER XI. 
On Curkenct in the United States ..... .320 

CHAPTER XII. 
On Credit 362 

CHAPTER XIII. 
On Eokeign Trade . . . 405 

CHAPTER XIV. 
On the Mercantile System 476 

CHAPTER XV. 
On American Tariffs . . . . . . . 490 

CHAPTER XVI. 
On Taxation 515 



ANALYSIS OF CHAPTERS. 



CHAPTER I. 

* ON THK HISTORY OF THE SCIENCE. 

FAG£ 

A. Definition of the science ...... 1 

B. Its basis and mode of development . . j . . 1 

C. Its history 2 

a. Oriental traffic. Abraham 2 

b. Hints in Homer, Ezekiel, Nahum, Herodotus . . 3 

c. Greek opinions ........ 3 

(1) Xenophon's "Ways and Means," and "House- 
holder" 4 

(2) Plato's " Eepublic " 5 

(3) Aristotle's " Economics," " Politics," " Ethics " . 6 

(4) Three reasons -why Greeks did not develop this 
science ........ 8 

(5) Their practical rules were good . . . 9 

d. Roman opinions 10 

(1) Cicero's " De officiis " 10 

(2) Cato, and the Moralists 10 

(3) Two reasons for their views . . . . 10 

(4) Liberality of Roman laws of property . . .11 
e Middle-age opinion. Religion and the Universities . 13 
/. The Bullion Theory, and its policy . . . .14 
g. The Mercantile System . . . . . . 17 

(1) Its origin . . ..... 17 

(2) How defended . 18 

(3) The Balance of Trade 19 

(4) Nations that adopted it 21 

h Recoil from the Mercantile System . . . .22 



Vlll 



ANALYSIS OF CHAPTERS. 



Outline of the laboi'S of its opponents . . 23 

(1) English writers ....... 23 

(a.) The pamphleteers . .... 23 

(6.) John Locke ....... 24 

(c.) David Hume 25 

(d.) Adam Smith 26 

(e.) Malthus, Ricardo, McCulloch, Senior, Mill 29 

(/) The Bullion Report of 1810 ... 30 
(^.) Henry Dunning Macleod . . . .31 

(2) French writers 32 

(a.) Quesnay, The Physiocrats, Agricultural Sys- 
tem 33 

(&.) Condillac 33 

(c.) Say 34 

(d.) Bastiat 35 

(e) Chevalier . . . . . . . 36 

(3) Italians. Genovesi . . . . . .37 

(4) Germans. ZoU-Verein, List, Stein, Kau . 38 

(5) Americans. National interest in the subject . 39 
(a) Secretaries of the Treasmy . . . 39 
(5) Congressmen. Commissioner Wells . . 40 

(c) A partial list of writers .... 40 

(d) Henry C. Carey, Walker, Bowen . . 41 



CHAPTER H. 



ON THE FIELD OF THE SCIENCE. 



A. Definition of a science 

B. First grand condition of a science 

C. Induction and deduction ex23lained 

D. Lord Bacon's methods . 

E. Experience and feigned cases . 

F. Secon.d condition of a science 

G. Physical and Moral Sciences ' . 
a. Economy in one sense moral 
h. In another sense not 
c. Its points of contact with morals 

H. It is a political, i. e. a social science 

a. Men in isolation not amenable to it 

b. God made men for society 



42 
43 
43 

44 
44 
44 
45 
46 
46 
47 
48 
49 
49 



ANALYSIS OF CHAPTERS. 



IX 



c. God the author of economical laws . 

d. Man m isolation weak, in society strong 

e. Provisional view of the gains of exchange 
Some leading definitions of the science 

a. The word wealth useless as a scientific term 
6. First reason of slow progress in the science 

c. Condillac's or Whately's definition . 

d. Value is a relative word 

e. Second reason of slow progress 
/. Other possible broader sciences 



CHAPTER III. 



ON VALUE. 



A. Value not a quality of one thing 

B. Origin of the word value ..... 

C. It implies a kind of comparison 

D. Two persons and two owners required to fix value 

E. An action of exchange required 

F. Value of the pencil in cents .... 

G. Exigencies of language ..... 

H. The value of anything always stated in terms of 
thing else ....... 

I. The motives to an exchange .... 

J. The simplest case of value . . . . . 

K. The ultimate definition of value 

L. Only six cases of value possible .... 

M. Ownership is always mutually transferred 

N. Value best studied through the term services 

O. Distinction between service and commodity 

P. Macleod's definition of value . . . • 

Q. Definition given satisfactory, because 

a. It covers anomalous cases . . '. . 

(1) Analysis of services exchanged . 
h. It expands the field of value to its true limits . 

c. It separates the notion of value from matter 

d. And from some obstinate illusions of language 

e. And discriminates utility from value . 

(1) Utility is free and ultimate 

(2) Value is mediate, and involves effort . 



X ANALYSIS OF CHAPTEES. 

(3) Utility is usually a common factor ... 85 

(4) And is eliminated from influence on value . 85 
/. Mistakes from confounding utility with value . 86 

R. Value a different thing from price ..... 87 

a. Numerical illustrations ...... 88 

6. Effect of improvements on value . . . .89 

S. No perfect measure of value attainable ... 90 

T. T^iirjitations of value in the two elements of efforts . . 92 

U. l^imitations in the two elements of desires . . . 94 

V. Equation of supply and demand . . . . .90 

W. Every rise or fall of demand tends to check itself . 9S 

a. Through a consequent rise or fall of value . . .98 

6. Through action on supply .... 99 

X. Three classes of services in the law of their value 100 

a. Those augmen table without increased difficulty . 101 

b. Those augmentable through increased difficulty . 101 

c. Those not augmentable at all .... 102 

CHAPTER IV. 

ON EXCHANGE. 

A. Principles of human nature involved in exchange . .103 

B. Society a hive of buyers and sellers . . . . 104 

C. God's will as indicated in diversity of natural gifts . 105 

D. Association and individuality . . . . . 106 

E. Interest the sole motive in exchange . . . .107 

F. All exchange depends on diversity of relative advantage 108 
a. Illustration of the tailor and blacksmith . . 108 
6. The greater the diversity of relative advantage, the 

more profitable exchanges become . . .109 

G. Freedom, association, invention, essential to just diversity 109 
H. The right to free exchange a natural right . . 110 

I. Governjuents formerly interfered with it . . .110 

a. And thereby destroyed natural gains . . . Ill 

b. And barred a natural progress . . . . .111 
J. But latterly have conceded it within home boundaries 112 

a. Illustration from Napoleon's policy . . . .112 
K. Opposed to free exchange are monopolies . . . 113 
a. Arbitrary prohibitions on the sale of home services . 113 
6. Arbitrary restrictions on the admission of foreign ser- 
vices . . . . . . . . 115 



ANALYSIS OP CHAPTERS. 



XI 



c. Patents and copyriglits unobjectionable monopolies 
L. The three great points of struggle .... 

CHAPTER V. 



ON PRODUCTION. 



A. Laws of Political Economy are cheering 

B. Definitions of " Produce," " Producer," " Product 

a. Similar meaning of the Latin producere 

b. Inadequate analysis of Adam Smith . 

C. Definition of "consume," etc. .... 

D. Are producers better than consumers ? . . . 

E. The beneficent law under production . . . 

a. Illustration of the mill . 

b. Illustration of the loom .... 

c. Illustration from agriculture 

d. Tendency towards a common right in inventions 
Effect on values of Nature's help in production 

a. Illustration of the gloves 

b. Motive to introduce machinery . 

c. Commodities decline in value relatively to labor 
A general glut of products impossible . 
a. Proofs of the proposition 
6. Dr. Chalmers' fallacy .... 

c. Each interested in the welfare of all 

d. Law of partial gluts ..... 

e. Production demands intellectual attainments 
Production increased by Division of Labor . 

a. Example of the pins .... 

b. Example of the watches .... 

c. Advantages of the division of labor 

(1) Improved dexterity .... 

(2) The saving of time . 

(3) The invention of tools . . . 

(4) Less waste of material 

(5) More economical distribution of labor 

(6) A saving in the use of tools 

(7) The advantages of wholesale and retail 

d. Disadvantages of division of labor 
(1} Monotonous work becomes irksome 



116 
117 



118 
119 
119 
119 
120 
121 
121 
121 
122 
123 
124 
124 
125 
126 
126 
126 
127 
127 
127 
128 
128 
129 
129 
130 
130 
130 
130 
130 
13Q 
131 
131 
131 
131 
131 



XU ANALYSIS OF CHAPTERS. 

(2) Tendency to dwarf the powers . . . 131 

(3) Undue dependence of the workmen . ,132 
e. Limitations to the division of labor . . . 132 

(1) From the extent of the market . . . .132 

(2) From the nature of the emploj'ment . . 133 

CHAPTER VI. 

ON LABOR. 

A Physical labor consists in moving things . . . 134 

a. Some illustrations of this . . . . 134 

B. Ph}'sical labor defined . . • . . . 135 
a. Nature helps gratuitously in production . . ,135 

C. Men have found helps in producing motion . . 135 

a. The domestic animals ...... 136 

b. The weight of water and force of wind . . 136 

c. Steam ......... 136 

d. To apply these capital is needed . . . . 137 

e. Labor, power-agents, capital cooperate in material 
production . . . . . . . .137 

D. The technical definition of labor . . . . 137 

E. Principles of the remuneration of labor . . .138 
a. Distinction between skilled and common labor . 138 
h. A natural monopoly unobjectionable .... 139 
c. Reward of skilled labor higher .... 140 

(1) From the scarcity of appropriate original gifts . 140 

(2) From the lack of requisite industry . . 140 

(3) From the lack of suitable training . . .140 

F. The law of supply and demand the law of wages . 141 

G. But this law as modified through supply by 

a. The agreeableness of the employments . . . 141 

h. The easiness of learning them ..... 442 

c. The constancy of work In them .... 143 

d. The amount of trust involved . . . . .144 

e. The probability of success . . . . . 146 

f. Custom, prejudice, and fashion ..... 147 

g. Legal restrictions and voluntary associations . . 148 
IL Demand for labor how constituted .... 149 

a. By the presence of capital ..... 149 

b. The more capital the stronger the demand . . 150 



ANALYSIS OF CHAPTEKS. XIU 

c. Wages-fund a dividend . . . . « . 151 

d. Number of laborers a divisor . . . . .151 

e. The average rate of wages the quotient . . . 152 
I. Popular remedies for low wages ineffectual . . . 153 

a. Government cannot act directly . . . . 153 
h. But may indirectly and beneficially . . • .155 

c. Public opinion may be useful . . . • l^^ 

d. The Malthus law of population ^^^ 

(1) No natural antagonism between fecundity and 

food 158 

e. Strikes are futile 1^^ 

(1) Are false in theory 159 

(2) Are pernicious in practice . . . • .161 

(3) Illustrations of this 1G2 

(4) Workmen and capitalists are copartners . .163 

(5) Tlie classes sliade into eacli other . . 164 

(6) Poor money a foe to laborers . . . .164 

(7) Mind must be interested .... 165 
/. Cooperation nothing new in principle . . . 165 

(1) Legislation has narrow limits in economy . 166 

(2) Should give equal rights to capital and labor . 167 

CHAPTER VII. 

ON CAPITAL. 

A. Relations of capital to labor and power-agents . 168 

B. Derivation of capital . . . • • • .168 

a. Its definition 169 

I. Some distinctions 169 

c. Mr. Carey's definition faulty . . . . 169 

rf. Distinction between capital and other property . 170 

C. How capital arises l-^l 

a. Origin of tools . . • • • • .172 

. h. Progress in tool-making . . . . • 173 

c. Capital brings gratuitous forces into play . .174 

d. Value of products created by aid of capital tends to 

decline relatively to the value of those less aided 

thus 174 

e. Power of capital in reproduction . . • 175 

D. The remuneration of capital . . . • • 1 ' ^ 



XIV ANALYSIS OF CHAPTERS. 

a. Definition of profits . . . . . . . 1^^ 

h. They spring from abstinence . . . . . 1^^ 

c. And are as legitimate as wages . . . •. . ^'^ 

d. Illustration from the flax-factory . . . . 176 

e. Illustration from ordinary loaning . . . . 1 78 
/. The capitalist creates a beneficent fund . . 178 
g. Strength of the motives to abstinence depend 

(1) On liberty 1^9 

(2) On equality . 179 

(3) On security 179 

£ Relations of capitalists to laborers . . . . ,179 

n. No antagonism between them .... 180 

b. Dependence of capital on laborers ... 180 

c. Dependence of laborers on capital . . . 181 

d. The laborer interested in the increase of capital . 181 

e. The capitalist not injured by high wages . . ^°^ 

F. Mr. Carey's law of distribution 1^^ 

a. Arithmetical illustration . ._ . . • ^^^ 

b. Profits the leavings of wages . . . . .184 

c. Tendency towards equality of condition among men 184: 

G. Distinction between circulating and fixed capital . . 185 
a. Changing proportions between those . . . 185 
h. Transformation of one into the other ... 186 
c. Corollaries — war . . . . . . 187 

CHAPTER YIIL 

ox LAXD. 

A. Best test of a generalization . . . . .188 

B. Questions of land have been vexed questions • . 188 

C. Means at band of settling tliem 189 

D. The ground principles . . . • . . 189 

E. First proposition . . . . . . . .190 

a. Ownership came in under work . . • . 190 

b. Lands originally valueless . . . . .190 

c. What is sold is not the inherent qualities of the soil 191 

d. Utility and value 191 

e. Land proprietors cannot sell God's gifts . . 192 

f. Sources of value in land . . . . . .193 

g. The United States give away lands . . . 194 



ANALYSIS OF CHAPTERS. 



XV 



h. The Englisli companies in the 1 7th century . 
i. The current proverb at the West 
j. The value of lands like all other values . 
h. Profits an element in lands .... 
I. Lands under a poor currency . . . . 

E. Second proposition ...... 

a. Proof of it . . . 

h. Gradual occupation of the earth in consequence 

c. Mr. Carey fails to break down this law 

d. His own law not inconsistent with this . 

F. Third proposition ....... 

a. Exemplification of the principle 

6. Produce rises as estimated in other commodities 

G. Fourth proposition 

a. Ricardo's law of Rent ..... 
h. The truth in it 

c. The errors in it ... . . 

d. The true doctrine of rent . . * . 
H. Fifth proposition ....... 

a. Fee-simple best, and reasons why . 
h. Moderately small farms best, because 

(1) The motives to production are more universal 

(2) Better supervision is thus secured 

(3) The masses are better educated 

(4) National strength is better maintained 

c. Illustrations from France ..... 

d. Illustrations from England and Scotland . 

e. Illustrations from Ireland ..... 



194 
195 
195 

195 
196 
196 
197 
198 
198 
199 
199 
200 
200 
200 
201 
201 
202 
202 

203 
203 

204 
205 
205 
206 
206 
207 
208 



CHAPTER IX. 

ON COST OF PROBUCTION. 

A. Is there such a thing as natural value ? 

B. Foresight important in production .... 

C. Cost of production sometimes the element of effort 
a. Illustration from amputation .... 
h. Illustration from knife-making 

D. Cost of production in relation to improved processes 

E. Cost of production made up of two. elements 

a. Cost of labor 



210 
211 
211 
211 
212 
213 
214 
214 



SVl ANALYSIS OF CHAPTERS. 

b. Cost of capital 214 

E\ c. Cost of labor made up of three elements . . . 214 

(1) Efficiency of the labor 215 

(2) Rate of nominal wages . . . . .215 

(3) Cost of the wages-material .... 215 

d. Three purposes of this analysis .... 215 

(1) To show the many elements in commercial calcu- 

lation ....... 215 

(2) To explain the diversity in nominal wages . 216 

(3) To explain the division between wages and 

profits 219 

e. Cost of capital made up of three elements . . 220 

(1) The rate per cent 220 

(2) The time of advance . . . . . .220 

(3) The risk of deterioration . . . . 221 
G. Higher cost of labor ends in lower profits . . 223 
H. A uniform rise or fall of wages does not affect value 223 

I. An unequal rise or fall does aflTect it ... . 223 

J. The same, mutatis mutandis^ is true of profits . . 224 

K. Machinery an important element in cost of production . 224 
L. Machinery not injurious to the wages of labor, because 

a. Labor is required to make, repair, and work it . .225 

6. It cheapens products and thus widens the market . 226 

c. It cheapens products used by the laborers . . . 226 
M. Price of raw materials tends to approximate the price of 

finished products . . . . . . . 227 

a. Illustration in cotton cloth ..... 227 

b. Illustration in lace 228 

N. Two branches now comjileted ..... 228 

CHAPTER X. 

ON MONEY. 

A. Money can be understood 229 

B. Inconveniences of barter 230 

C. Money an invention — convenience sake . . . 231 
p. Its sole characteristic, a generalized purchasing-power 231 

a. Value in a book, and value in money . . . 232 

E. Money economizes labor ...... 232 

F. Brings buyers and sellei-s together .... 233 



ANALYSIS OF CHAPTERS. XVll 

G. Generalizes a purchasing-power in point of time 233 

H. Makes it portable, divisible, and loanable . . . 233 

I. First proposition 234 

a. Meaning of the word medium .... 234 

h. Illustration of the railroad ticket .... 235 

c. Small ratio of money to property .... 236 

d. Hume's comparison ....... 236 

e. Money a generalized capital ..... 238 
/. The amount needed determined by its nature as a 

medium ........ 23S 

g. Rapidity of circulation in this connection . . 240 

J. Second proposition ....... 241 

a. Explanation of the word measure . . . . 242 

h. Relations of denominations to the medium . . 243 

c. Liability to error . . . . . . . 244 

d. French system of weights and measures . . .247 

e. This second function complicates the subject of money 248 
K. Third proposition . . . . . . . 249 

a. Different materials used as money . . . 249 

b. Gold and silver are the best ... . 249 

(1) On account of their steady value . . . 249 
(a.) On account of the steady demand for them 252 
(&.) Their uniform cost of production . . 253 
(c.) Their quantity ..... 254 

{d.) Their fluency 256 

(e.) Every rise or fall tends to check itself. . 259 

(/.) A more or less rapid circulation . . 260 

(2) Because they are self-regulating . . . 261 
(a.) Legal relations of gold to silver . . 261 
(6.) Subsidiary coins ...... 263 

(c.) The matter of alloy .... 264 

((i.) Universal Coinage 265 

(e.) French plan 266 

(/.) Elliott's plan 267 

(^r.) German and Austrian coinage . . 267 

(A.) Natural laws of distribution . . . 268 

(3) They are portable, divisible, and impressible . 272 

L. Fourth proposition 275 

a. Grounds of it 275 

6. Dutch illustrations . . . . . . . 276 



XVlll 



ANALYSIS OF CHAPTERS. 



c. Englisli illustrations 

d. American illustrations 
M. Fifth proposition .... 

a. Definition of money 
i. Nomenclature of money 

c. The element of credit in money 

d. Difficulties about credit 

e. The denomination-dollar 

f. Inconvertible paj^er depreciates . 

g. John Law and his system 
A. The French assignats . 
i. American Continental money . 
j. American legal-tenders 
k. American State bank money . 
I. American national bank money . 
m. History of the Bank of England 
n. Different spheres of money and credit 

N. Sixth proposition .... 
a. Origin of usury fallacies . 
h. Exposure of these fallacies . . 

c. Inconsistencies of governments . 

d. Action of England .... 

e. Action of Massachusetts and Rhode Island 

f. Retraction of Adam Smith . 



278 
281 
285 
285 
286 
288 
289 
290 
291 
292 
295 
298 
299 
300 
302 
304 
311 
312 
312 
313 
318 
319 
819 
319 



CHAPTER XL 

ON CURRENCY IN THE UNITED STATES 

A. Great variety in our forms of money 

B. Colonial currencies ...... 

C. The depreciation of Colonial bills . 

D. Massachusetts redeems her bills . 

E. Parliament forbids their issue to the Colonies . 

F. The Revolutionary paper ..... 

G. Alexander Hamilton and English finance 

H. Mr. Morris' Bank of North America . . . 
I. The " pine-tree " coinage of Massachusetts . 
J. First suggestions of a decimal money 
K. Hamilton's Report as Secretary of the Treasiiry 
L. The Mint, its coins and ratios .... 



320 
321 
322 
322 

322 
323 
32i 
325 
327 
328 
329 
330 



ANALYSIS OF CHAPTEES. 



XIS 



a. Binary system 

1). The word dollar ..... 

c. Tlie figure of Liberty . . . , 
M. A national bank then needful . 
N. Its constitutionality denied .... 
O. Charter of the first United States Bank . 
P. Practical operation of it 
Q. Multiplication of State banks . 
K. Second bank of the United States 
S. Jackson's opposition to it 
T. The " Specie Circular " . . . , 
U. The sub-treasury system .... 
V. The increase and character of the State banks 
W. Secretary Chase and the war . . 
X. The national bank system of 1863 

a. Its patriotic origin .... 

h. Method of organization under it 

c. Its benefits ...... 

d. Its dangers ...... 

e. Possible improvements of it 
Y. Coin banks ....... 

Z. Diiierent kinds United States money 

a. Too much in quantity . . . 
1). Prof. Price's view of currency 

c. Amasa Walker's view of currency . 

d. Author's view of cm-rency . 



330 
331 
332 

336 
337 
338 
339 
340 
341 
342 
343 
343 
344 
344 
345 
346 
347 
348 
349 
354 
356 
357 
358 
360 
360 
361 



CHAPTER Xn. 



ON CREDIT. 



A. The peculiarity of credit 

B. The terms debt and credit . 

C. Traffic in credits . . . 
•D. Macleod's distinctions . 

a. Specific things and credit rights 
h. The words loan and borrow 

E. Three kinds of values 

F. The instruments of credit are 
a. Promises to pay 

h. Orders to pay 



362 
363 
364 
364 
304 
365 
366 

367 
367 



XX 



ANALYSIS OF CHAPTERS. 



c. Promises to pay are 

(1) Book-accounts . . . . . . .367 

(2) Promissory notes of individuals and nations 368 

(3) Bank bills 370 

(4) Bank deposits 371 

(a) A new capital created • . . ,373 
(l) Actual, but limited . . . . 373 

(5) Discounted notes . . . . . .374 

(a) Form of discountable note . . . 375 
(V) Form of collateral pledge . . . .376 

d. Orders to pay are 

(1) Bills of excliange 376 

(2) Checks or drafts 382 

(3) Circular letters of credit .... 384 
G. The advantages of credit ...... 385 

a. It passes capital from less to more productive hands 386 
h. It economizes the general operations of exchange . 388 

c. It dispenses vrith the use of masses of coin . . 389 
(1) But never can dispense with coin altogether . 390 

d. Other credit ojjerations . . . . . 391 

e. Scotch cash credits 391 

H. The disadvantages of credit . . . . . 392 

a. It sometimes makes capital available . . .392 
h. Inherent uncertainties ..... 393 

c. Undue multiplications ...... 393 

d. Commercial crises ...... 394 

(1) Cause and course of a crisis . . . .395 

(2) Crisis of 1873 395 

I. A national debt a sort of mortgage . . . .398 

a. It has incidental advantages . . . . 399 

i. But greater burdens . . . . . .399 

c. Each generation should bear its own bm-den . 400 

d. The unfunded debt shovild be cancelled . . ' . 401 

e. The funded debt paid in gold .... 402 

f. Consols ex23lained . . ... . . . 403 



ANALYSIS OF CHAPTEES. 



VX1 



CHAPTER XIII. 



ON FOREIGN TRADE. 

A. No new principles in foreign trade . . • 

B. But a separate treatment needful .... 

C. Diversity of relative advantage .... 

D. Grounds of national diversity .... 

E. When international exchange is profitable 
a. French silks and English cottons 

F. Desires, efforts, estimations, as before 

G. Unequal absolute cost illustrated .... 
H. Equal absolute cost illustrated .... 

I. Limits of value in foreign trade . . . • 
J. Equation of international demand 

a. Arithmetical illustrations . . . . • 

i. Same principle in gold, or other articles 
K. Purchase by exports is cheap purchase . 
L. Folly of attempting to " compete " in everything 
M. Effect on trade of improved processes . 

a. The benefit Avill be shared by both nations . 

i. Sometimes more by the second nation . . 
N. Cost of can-iage 

a. It increases cost of production . . . , 

b. Each nation does not necessarily pay its own . 
O. International trade should be free . . . , 

a. The mercantile system restricted it . 

h. The protective system restricts it . . . 
P. Origin of the word tariff ..... 
Q. Nature of the thing tariff ..... 
Kr. Distinction between revenue and protective tariffs 

a. A distinct principle underlies them 

b. The two ideas cannot be united 

c. Low duties more productive. Free Trade defined 
B. Objections to free trade answered . . . . 

a. It is not a theory 

6. It will not depress wages . . . . . 

c. Why protection has been advocated . 

d. Manufactures would not collapse under freedom 

e. Nor would diversity suffer .... 



405 
405 
407 
408 
408 
409 
411 
412 
413 
414 
415 
416 
417 
418 
418 
419 
420 
421 
421 
422 
423 
424 
424 
425 
426 
426 
427 
428 
429 
431 
432 
433 
435 
437 
441 
441 



xxu 



ANALYSIS OF CHAPTERS. 



u, 



/. Colbert better than a protectionist 

g. Higli profits do not make protection needful 

Ti. Nor do high wages . . . . . 

i. Nor does less skill ..... 

j. Nor does true independence 

k. Nor does cost of labor .... 

(1) Cost of labor analyzed .... 

(2) EngUsh wages compared with our own 

(3) Wages compared with materials . 
Objections to protection stated 

a. It is extra-governmental .... 
h. It is a matter of finesse .... 

c. It is a wasteful way to reach the end proposed 

d. It makes a promise never kept 

e. It gives birth to smuggUng and frauds 
/. It defeats itself .... 
g. Does not raise average prices 
h. Condemned by its fruits . 
The voice of exjierience on free trade 
a. The Greek examjile 
&. The Roman example . 

c. The English example 

d. The imperfect French example . 

e. The German example 

f. The Belgian example . 



447 
449 
450 
452 
453 
455 
456 
457 
458 
459 
459 
460 
462 
463 
464 
465 
466 
467 
468 
468 
468 
469 
472 
473 
474 



CHAPTER XIV. 



ON THE MERCANTILE SYSTEM, 

A. Three epochs in the science of exchange 

B. Fallacies of the mercantile system . 
a. Illustrations from England and France 
h. Smugglers became the principal traders 

C. First device of the system, prohibitions 

D. Second device, high duties 
a. Illustration from the silk manufacture 
h. Abolition of the silk duties 

c. The guilds . 

d. Corn-laws ..*... 

e. Considerations condemning this device 



476 
477 
478 
481 
481 
482 
483 
483 
485 
486 
487 



ANALYSIS OF CHAPTEES. XXIU 

E. Third device, bounties ....... 488 

P. Fourth device, colonies ...... 489 

CHAPTER XV. 

ON AMERICAN TARIFFS. 

A. England's policy towards the American Colonies 490 
a. The " Navigation Act " . . . . 491 
&. Prohibitions on manufactures ... 493 
c. Considerations condemning the colonial policy . 494 

B. Want of power to regulate commerce under the Con- 

federation ........ 496 

C. The Tariffs under the Constitution .... 497 
a. The "Hamilton Tariff" of 1789 .... 498 

(1) Its low duties 498 

(2) Its steady revenue 499 

(3) Its principles of tonnage and protection . .499 
ft. The " Calhoun Tariff" of 1816 ... 500 

(1) Unfortunate connection of tariffs witli politics . 500 

(2) The restrictive system fairly entered upon . 501 
c. The " Clay Tariff" of 1824 501 

(1) Higher duties 501 

(2) Protected interests not satisfied .... 502 
i. The "Tariff of abominations" of 1828 ... 502 

(1) Protection had become unpopular . . . 502 

(2) Daniel Webster first votes for protection . 502 
s. The " Compromise Tariff" of 1833 . . . .502 

(1) Presidential canvass hostile to protection . 502 

(2) The sliding scale of lower duties . . . 502 
/. The "Whig Tariff" of 1842 503 

(1) Average of duties very high .... 603 

(2) Factitious character of the industry stimulated 503 
£r. The "Walker Tariff" of 1846 . . . . .503 

■ (1) Low duties, but discrimination . . 504 

(2) Increase of revenue ...... 504 

A, The "Tariff of 1857" 504 

(1) Lower duties, and increase of free list . . 504 

(2) Falling off of revenue, avei-age of duties . . 504 
i. The "Morrill Tariff" of 1861 504 

(1) It was not called for by the people . . . 505 

(2) It was unfavorable to government credit . . 505 



XXIV ANALYSIS OF CHAPTERS. 

(3) Its free list delusive 507 

(4) Too many articles taxed, too liigli rates . .507 

(5) JSIot more productive tlian British tariif . 508 

(6) False principles of tariff of 1871 . . .509 

(7) Seven general remarks on present j)rotection 510 

CHAPTER XVI. 

ON TAXATION. 

A. Taxation legitimate on principles of exchange . .515 

B. The llight of Property is the 2:)ower to render services 517 

C. Taxes, then, fall properly on exchanges . . .518 

D. And should be pi-oportionate to their gains . . 519 

E. Taxes are either direct or indirect . . . .520 

a. Du-ect taxes fall on income or expenditure . . ■ 621 

b. Indu-ect on imports or services in transition . . 521 

c. An income tax unexceptionable in principle . 522 

d. Its three great advantages ..... 523 

e. Objections to it answered ..... 524 

f. Taxes on expenditures, sjaecial, and hence objection- 

able 525 

g. A house-tax, however, less so ... . 525 
h. General advantages and disadvantages of each form 526 

F. Opportunities for experiment ..... 526 

G. Credits are properly taxed 527 

H. Duties and taxes, to be productive, should be low . 528 

a. The whiskey-tax . . . . . . .529 

I. Duties and taxes should be simple .... 529 

a. Specific and ad valorem duties should not be com- 
bined 529 

I). Specific duties better than ad valorem . . . 529 

c. Once for all ....... 530 

J. Vexatious and unproductive taxes should be thrown off 530 

a. Improvement in internal revenue .... 531 

b. Just such required in the tariff . . . . 531 

c. No part of legislation to foster industries . .531 

d. An excise should go with certain duties . . 531 
K. Taxes should be collected just before disbursement . 631 
L. Poorer citizens should be mostly or wholly exempt . 632 
M. Who pays indirect taxes ?...... 532 

N. Do taxes diffuse themselves ? 533 



ELEMENTS OE POLITICAL ECONOMY. 



CHAPTER L 

HISTORY OF THE SCIENCE. 

Political Economy is the science of exchanges, 
or, what is exactly equivalent, the science of value. 
Properly to unfold this science, requires an analysis 
of those principles of human nature out of which 
exchanges spring; an examination of the providen- 
tial arrangements, physical and social, by which it 
appears that exchanges were designed by God for 
the welfare of man; and an inquiry into the laws 
and usages devised by men to facilitate or to im- 
pede exchanges. The science, accordingly, is built 
up partly on facts of consciousness and partly on 
facts of outward observation. When its proposi- 
tions are strictly deduced from acknowledged prin- 
ciples of human nature, and are shown to be conso- 
nant with the structure of the world and of society ; 
when they are simply and logically set forth in a 
system ; and when, in their light, human institutions 
and laws relating to exchanges are correctly explained 
and estimated ; then the science of value is soundly 
based and orderly unfolded. An attempt to base and 
to develop the science of value thus will be made in 
the following pages ; but before that work is fairly 
entered upon, it will be well to take a preliminary 



2 ELEMENTS OF POLITICAL ECONOMY. 

glance at the history of the science, and to trace the 
steps by which successive inquirers have brought 
Political Economy to its present stage of develop- 
ment. 

While labor is as old as the race, and exchanges 
are as old as society, and v^hile doubtless in all agea 
individual inquirers have tasked their minds with 
some portions of the subject, Political Economy as a 
science can hardly be said to have existed till within 
a period comparatively recent. Men exchanged 
among themselves services and commodities, and 
found their account in exchanging, long before the 
dawn of authentic history. The first commercial 
transaction on record dates back about two thousand 
years before Christ. It v/as the purchase by Abra- 
ham of the cave and field of Machpelah. " And 
Abraham weighed to Ephron the silver which he had 
named in the audience of the sons of Hethjfour hun- 
dred shekels of silver, current money with the mer- 
chant." All this implies at that early day fixed con- 
ditions of trade. There were merchants as a class. 
Silver by weight was already a medium of exchange 
passing from hand to hand. It was current money 
with the merchant. In the absence of written doc- 
uments a bargain was made in the presence of living 
witnesses. It was " in the audience of the sons of 
Heth, before all that went in at the gate of his city, 
that ,the field and the cave were made sure unto 
Abraham for a possession." An earlier passage in 
the life of Abraham shows that gold as well as silver 
u as already reckoned an article of merchandise. It 
is said that Abraham departed from Egypt " very 
deh in cattle, in silver and gold." 



HISTORY OF THE SCIENCE. 3 

Homer makes no mention of money, as he un- 
doubte'dly would have done had he been acquainted 
with it, but there are many passages in his poems 
that indicate a brisk direct exchange of products as 
characteristic of those times and countries. There 
was also then and there a sort of common measure 
of things exchangeable. Various things are men- 
tioned in these poems as being worth so many oxen. 
The twenty-seventh chapter of Ezekiel gives a vivid 
picture of the immense commerce centering in Tyre. 
Nineveh, according to the prophet Nahura, " multi- 
plied her merchants above the stars of heaven." 
Herodotus makes the probable statement that the 
Lydians of lesser Asia were the inventors of coined 
money ; and the same writer describes with minute 
accuracy the caravan routes by which Carthaginian 
enterprise penetrated the interior of Africa for the 
sake of a trade in dates and salt and gold-dust and 
slaves. The records of the voyages of Hanno and 
Hamilco show the Carthaginians daring unknown 
seas also in the interests of traffic ; coasting outside 
the pillars of Hercules, southward to the mouths of 
the Senegal and Gambia, and northward to the 
British Isles. Athens, Alexandria, Venice, Lisbon, 
Amsterdam, London, and New York, have been 
among the busy marts on the Mediterranean and 
the Atlantic, while counterparts to their activity in 
trade have existed in all ages in the farthest east. 

The earliest writer known to us who treated eco- 
nomic subjects at any length is Xenophon. Before 
the middle of the fourth century before Christ this 
accomplished Athenian published a treatise " On 
Ways, and Means." This early essay, not indeed on 



4: ELEMENTS OF POLITICAL ECONOMY. 

Political Economy, but on some of the subjects with 
which that science has to do, contains, together with 
much that is fallacious, some sound and liberal prin- 
ciples. Its object is to propose methods for enhan- 
cing the prosperity of the Athenian State. Praising 
the soil, the climate, the mines, the coins, the com- 
mercial position of Athens, Xenophon suggests that 
the State offer various encouragements to the settle- 
ment of aliens, in order to swell the active popula- 
tion and increase the revenue from the aliens' tax ; 
that merchants and shipmasters of all nations receive 
special honors in the city, in order to attract more of 
them thither and thus augment the income from 
duties on imports and exports ; that prizes be offered 
the presidents of the courts to expedite the trial of 
commercial causes; that inns, warehouses, and marts 
for the sale of goods be erected at the public expense 
for the sake of the rents; that government as such 
undertake commercial enterprises ; that especially 
the silver mines be worked on the most extensive 
scale, as well on government account as by private 
and joint-stock adventurers, so that the State might 
enjoy direct profits in addition to the prices and the 
twenty-fourth part of the produce of the mines pur- 
chased by individuals; and that finally a council of 
peace be instituted, by whose mediation war might 
be avoided, and the State, in the enjoyment of dura- 
ble tranquillity, enter gradually upon these measures 
of national improvement, which, moreover, ought to 
be begun and continued by consulting the ancient 
oracles, and by supplications to the gods. Xeno- 
phon also has left us a dialogue entitled " The 
Householder," in which he says that economy is a 



HISTORY OF THE SCIENCE. 5 

science by itself, making the legal distinction be- 
tween oiKia and oTkos, the house, and the whole estate. 

Plato in the eleventh and twelfth chapters of the 
second book of his " Republic," admirably sketches 
one important principle of the science, namely, the 
necessity men are in, from their multifarious wants, 
of uniting in society, in which each individual may 
devote himself to that branch of industry for which 
he is best fitted, and then by exchange supply his 
remaining wants. " More will be done, and better, 
and with greater ease, when every one does but one 
thing, according to his genius, at the proper time^ 
and when at leisure from all other pursuits." But 
this speculative view is adduced to account for the 
origin of a political state, and is so far from being 
carried out to its practical applications either eco- 
nomically or politically that Plato goes on to advo- 
cate community of goods in the leading class of his 
ideal state, and the exclusion of husbandmen and 
artisans from all share in the government. 

Aristotle is sometimes called the father of Political 
Economy. He is certainly the father, if not of the 
Bcience, of this name of the science, which name, 
however, he uses in a very different sense from that 
in which it is now used. At the opening of the 
second book of his " Economics " he distinguishes 
economy into four kinds, the regal, the satrapical, the 
political, and the domestic. By the first he means 
the central, and by the second the provincial, admin- 
istration of a great empire like that of Persia ; by 
the third, the administration prevailing in free states ; 
and by the fourth, what we also mean by domestic 
economy. It is in the last sense, as indeed the name 



6 ELEMENTS OP POLITICAL ECONOMY. 

(otKos, estate, and ro/^o?, laiu) implies, that the ancients 
generally conceive of economy ; and hence, although 
Aristotle is the first to use the term political econ- 
omy, it is not so much in his " Economics" as in his 
"Ethics" and " Politics" that we find his real con- 
tribution to our science. According to Aristotle's 
division of the practical sciences, Ethics treat of the 
nature and welfare of man apart from the social re- 
lations ; Economics view him under the social rela- 
tions of the family ; and Politics under the social 
relations of the state. In all three of these treatises 
accordingly of this transcendent thinker are to be 
found acute definitions, shrewd remarks, and pretty 
copious information, relating to the proper science of 
Political Economy. This, for example, is a perfect 
definition of property: — '■'■But by property we mean 
everything, of which the value is measured by moneyP 
(Ethics, IV. i.) The proper boundary line between 
economy and morals is drawn as follows: — " Wlien- 
ever there is no agreement made about the service per' 
formed, those who confer a favor freely for the sake 
of the persons on whom they confer it, cannot com- 
plain; for the value of it is not measured by moyiey, 
and no equivalent price can be paidP (Ethics, IX. i.) 
The same chapter accurately describes the ultimate 
phenomenon of value as betw^een the two persons 
exchanging : — " For each fixes his mind on that 
which ]ie happens to want, and for the sake of that 
will give ivhat he does give^ Aristotle understood, 
as well as any one understands at present, the func- 
tion of money as a measure : — " Money, therefore, as 
a measure, by making things coinmensurable, equalizes 
them; for there could be no commerce without eX' 



HISTORY OF THE SCIENCE. T 

change, no exchange without equality^ and no equality 
without the possibility of being commensurate." (Eth- 
ics, V. V.) In direct opposition to Plato's proposed 
community of goods, he insists strongly upon the 
rights and benefits of private property (Pol. 11. v ) ; 
apprehends the true origin of money, and that it is, 
in common with all other forms of property a mere 
means, no more than they, an end in itself (Pol. I. 
ix.) ; and estimates agriculture highly, as the ground 
of all other arts, and as most favorable to health, 
morals and good government. (Econ. I. ii.) Still 
Aristotle was not wholly emancipated from the prej- 
udices of his time. Remarkable as was his sagacity 
in matters economical, he yet held views incompati- 
ble with a sound and complete science of economy. 
For example, these : — '•'•And indeed the best regulated 
states will not permit a mechanic to be a citizen; for 
it is impossible for one who lives the life of a mechanic 
or hired servant to practice a life of virtue.''^ (Pol. 
III. V.) " For usury is most reasonably detested^ as 
the increase of our fortune arises from the money it- 
self and not by employing it for the purpose for which 
it was intended^ (Pol. I. x.) '■^ It is clear then that 
some men are free by nature, and others are slaves, 
and that in the case of the latter the lot of slavery is 
both advantageous and just." (Pol. I. v.) 

There is another Greek contribution to our science, 
important to be mentioned although the author of it 
is unknown, in a dialogue entitled the " Eryxias," 
in which Socrates in conversation with Eryxias is 
made to discourse copiously on the nature and forms 
of wealth. This remarkable piece of discussion is 
probably not much later than the time of Aristotle 



8 ELEMENTS OF POLITICAL ECONOMY. 

himself, perhaps about three hundred years before 
Christ. The author of it perceives clearly and makes 
Socrates fully expound that things are possessed of 
value simply because they can be exchanged for 
other things that are more wanted, that all values 
are more or less local, and that " those persons who 
teach music or grammar, or some other science, who 
in return for this obtain what is necessary for them 
as a remuneration for this instruction," also deal in 
values and are possessed of wealth. 

There appear to be three principal reasons why 
the Greeks, who were so intellectually capable of 
it, and who, as we have just seen, really touched 
the foundations of it, did not develop any full 
system of Political Economy. In the first place, 
their affairs of private life were wholly subor- 
dinate to those of public life ; and, consequently, 
the varied forms of private and associated indus- 
try could not win that attention, which, at present, 
they are able to compel. To the Greeks the State 
was everything, and the individual only that which 
the State allowed him to be. In the second place, 
the institution of slavery threw its shadow over 
most of the branches of industry. It was inevi- 
table that employments committed mainly to slaves 
should seem mean to the free. Only agriculture and 
commerce, carried on on a large scale, and scarcely 
these, escaped this damaging influence. Even Aris- 
totle, who says, " The best nation is a nation of farm- 
ers" (Pol. VI. iv,), says also, ^'■Neither should they 
ivho are destined for office he husbandmen." (Pol. VII. 
ix.) It lessened no man's consideration, however, in 
the public opinion of the Greeks, to have any kind 



HISTORY OF THE SCIENCE. 9 

of industry carried on on his account, provided he 
did not work at it with his own hands. In the third 
place, the constant recurrence of wars interfered 
sadly with the free expansion of industry. 

Nevertheless, the Greek States showed practical 
good sense in their economical regulations. They 
fell into no such egregious follies as have marked the 
legislation of modern states. There was no inter- 
dicting the exportation of raw materials ; no favor- 
ing of manufactures at the cost of the agricultural 
class ; no prohibitions on the export of specie ; no 
efforts to preserve a factitious balance of trade ; and 
no duties on imports except for purposes of revenue. 
The usual customs' duty in the port of Athens was 
two per cent, of the value of the goods. The duty 
laid by Athens in the ports of her subject-allies waa 
generally five per cent. ; and when in a few excep- 
tional cases the rate was raised to ten per cent., it 
was regarded as extortion. In all essential respects, 
iherefore, there existed freedom of industry and free- 
dom of trade.i 

We should expect beforehand that the more prac- 
tical Eomans, lovers of law and order, and exhibiting 
to the world many of the high qualities of citizen 
life, would make some valuable contribution to the 
science of exchanges. In this we are disappointed. 
Though in the earlier and better days of Rome, agri- 
culture was highly esteemed, the blighting institution 
of slavery brought labor, the mechanical arts, and 
commerce more and more into disrepute. The lands 
were tilled by slaves. Slaves became the artisans ol 

1 See Boeckh's Public Economy of Athens, and Heeren's Ancient Greece, 
chap. X. See also Macleod's Economical Philosophy, vol. i. pp. 47, 135. 



10 ELEMENTS OF POLITICAL ECONOMY. 

the country. As always happens under such circum- 
stances, the freemen, the citizens, came to feel them- 
selves above such degrading occupations. It is piti- 
ful to hear Cicero declaim against the noble rights 
of labor. In the " De Officiis " there is a whole para- 
graph of condemnation for those branches of man- 
ufacturing and commercial industry which ought to 
be regarded not only as honorable but as the life and 
strength of the State. One sweep of his pen pushes 
out of the pale of respectability the whole class of 
mechanics. " All artisans are engaged in a degrading 
profession," says he. Again, " there can be nothing 
ingenuous in a workshop." Trade and commerce 
fare no better at his hands. When carried on on a 
small scale they are to be regarded as disgraceful ; 
when on a large scale they must not be greatly con- 
demned ! When social prejudices and views of laboi 
like these are promulgated by the foremost man of 
his time, the best educated and the most liberal, 
there is no longer room for surprise at the lack of 
Roman contributions to Political Economy. 

Moreover, the Roman moralists regarded the accu- 
mulation of wealth as undermining those virtues in 
which they placed the perfection of character. Cato, 
the censor, in his denunciations of luxury, which is 
the result of accumulation, was a representative of 
the whole class of moralists. Their position ought 
not to Surprise us for two reasons. First, the stream 
of the Roman wealth, much of it at least, proved a 
curse and not a blessing, not because wealth is not a 
blessing, but because its waters instead of being dif- 
fused everywhere, rushed at once into a few huge 
reservoirs — there was no natural and general distri- 



HISTORY OF THE SCIENCE. H 

bution of it. Second, the source of most of the 
wealth was as illegitimate as its absorption by the 
few great families. It did not come from the peace- 
ful and gradual development of the national re- 
sources ; it came from conquests, from tributes, often 
from official extortion from the provincials. A 
comprehensive theory of value will hardly be helped 
forward in connection with such moral notions, such 
views of labor, and such methods of gain, as pre- 
vailed at Rome. 

The Roman Law, nevertheless, laid down admira- 
ble definitions and rules relating to property, and 
drew a sharp line of distinction, the importance of 
which is not even yet fully acknowledged, between 
corporeal and incorporeal property, that is to say, 
between commodities and claims. One would have 
to try hard before he could improve the beauty or 
the brevity of Ulpian's definition of wealth : " Ea 
enim res est, quse emi et vendi potest." For that is 
wealth which may he bought and sold. The Insti- 
tutes of Justinian (II. 2) distinguish corporeal prop- 
erty, " such as land, a slave, clothes, gold, silver, and 
other things innumerable," from incorporeal prop- 
erty, " such as mere rights, an inheritance not yet 
received, a usufruct, uses, and all obligations how- 
ever contracted." The terms Res, Bona, Pecunia, 
and Merx, in Roman Law include rights as well as 
things. The Digest lays down this principle : " Om- 
nium rerum, quas quis habere, vel possidere, vei per- 
seqid potest, venditio recte fit." A person may laiv- 
fulhj sell anything which he has or possesses or has 

THE RIGHT TO SUE FOR.^ 

1 See manj' more quotations to the same eifect in Macleod, pp. 144, 145. 



12 ELEMENTS OF POLITICAL ECONOMY. 

In all that related, moreover, to the proper acquisi- 
tion and exchange of property, and to the manage- 
ment of the ordinary sources of national income, the 
Romans exhibited a strong sense of justice, together 
with moderation and practical wisdom. They taught 
the world something in the matter of taxation. 
They opened up new sources of revenue, from which 
governments still think it useful to draw. They 
levied duties in their ports as a simple expedient of 
taxation. They knew nothing of what has since 
become famous under the name of Protection. The 
rate of the duties in Cicero's time was five per cent, of 
the value of the goods ; in the time of the emperors, 
two and one half per cent. ; and the highest duty 
known to the Eoman custom-house was twelve and 
one half per cent. Augustus introduced an excise-tax 
of one per cent, on the value of all things which were 
sold. The same emperor laid a tax of five per cent, on 
legacies and inheritances. There was a tax on bach- 
elors. In the provinces at least, a door-tax was 
sometimes exacted. The public lands, the mines, 
the salt-works, and especially the tributes, were the 
remaining sources of income.^ 

It will be noticed from the points already made, 
that both the Greeks and Romans clearly perceived 
that exchans^eability is the one quality of all things 
having value, in which the value itself resides, what- 
ever may be the other nature of those things ; and 
also, that the Greeks and Romans, taken together, 
recognized three great classes of valuable things: 
namely, first, both alike, of course, corporeal things, 
or commodities ; secondly, the author of the " Eryxias" 

1 See articles " Vectigalia " and " Portorium " in Diet, of AnI iquit-fs. 



HISTORY OF THE SCIENCE. 13 

at least, incorporeal services, like those of the teacher ; 
and thirdly, the Roman Law certainly, incorporeal 
rights, or claims, such as debts, copyrights, patents, 
shares, and so on. Antiquity, accordingly, though 
its contributions to our science in the way of con- 
struction are meagre enough, perceived after all some 
of its fundamental distinctions with great clearness. 

The confusion consequent upon the breaking up 
of the old Roman empire; the settlement of the 
barbarian nations in the seats of the ancient civiliza- 
tion ; the gradual growth of feudalism, than which 
no system could be more hostile to a free and varied 
industry ; the almost exclusive occupation of men's 
minds during the Middle Ages, with religious ques- 
tions, and with the intricacies of the disputatious 
schoolmen ; the prevalence of the monkish idea that 
contact with the world was contaminating; the fact 
that the universities were under the control of the 
clergy, who only allowed in them a meagre curricu- 
lum of scholastic studies together with the civil law ; 
and the fact that war and rapine, rather than the 
supply of their mutual wants, gave occasion to the 
intercourse of nations with each other; all these 
contributed to divert attention for centuries from the 
subject-matter of the science of exchanges. 

In our survey thus far, if we have found little pos- 
itive light thrown as yet upon the science of value, 
we have at least discovered some of the reasons why 
such light could not be thrown. Absence of compre- 
hensive investigation, however, does not necessarily 
imply the lack of a theory. In truth, there was a 
half-developed theory of value, which exerted a pro- 
digious influence, certainly from Cicero's time, even 



14 ELEMENTS OF POLITICAL ECONOMY. 

down into the seventeenth century. It is remarkable 
that this earliest general doctrine of value, which I 
shall venture to call the Bullion Theory, came into 
currency in direct contravention of the great author- 
ity of Aristotle. That philosopher taught clearly 
that money is but an instrument towards a further 
end, and derives all its importance from being an 
instrument ; but the later less acute observers, per- 
ceiving that gold and silver were the money of all 
civilized nations, fell into a curious mistake in regard 
to the nature of money, and came to give to these 
metals a factitious importance by regarding them as 
the real and only wealth. They overlooked the fact 
that these metals are a commodity, that they owe 
their value to efforts and desires just as other com- 
modities do, and that they are bought and sold like 
all other commodities. With useful products of any 
kind one can always buy gold and silver. To trade 
is nothing but to barter one commodity for another, 
— to exchange corn for silver and silver for corn. 
Unless the trade is fraudulent, the one is equally 
valuable with the other ; and it would seem as if the 
simple consideration that men are willing to part, 
and do constantly part, with gold and silver to buy 
other things, would have been fatal to the prejudice 
that the precious metals are the only wealth. 

There were however two things that seemed to 
sustain -the Bullion theory. One was, that money ia 
always the measure of value. " How much is it 
worth " The answer comes, so many dbllars. Dol- 
lars are the denomination in which value is reckoned, 
just as degrees of the thermometer are the denomi- 
nation by which heat is measured. The difference 



HISTOEY OF THE SCIENCE. 16 

between value itself and the measure of value — be- 
tween a bushel of wheat and that round measure by 
which we determine that there is a bushel — seems 
obvious enough ; but money has this peculiarity, it 
is not only a measure of value, but, so far as this 
expression is ever true of any one commodity, it has 
value in itself. There is no heat in a thermometer, 
and no wheat in a bushel-measure, but a dollar is not 
only a dollar measure, but a dollar value, and we can 
see how the fact that dollars both had value and were 
the measure of all other values, gave some plausibil- 
ity to the notion that the dollars were all. The other 
thing that made the Bullion theory plausible was the 
use of gold and silver as the universal medium of 
exchange. They came to be such medium simply in 
consequence of their convenience and their nearly uni- 
form value; and because they were such a medium, 
everybody wanted them, and whoever had them 
could get with them whatever else he wanted. Be- 
cause the great thing was to get money, men seemed 
to think that money was the only thing to be got ! 

I cannot find that the Bullion theory had anything 
better to support it than these two deceptive pillars ; 
and yet for a very long period, and by many well- 
informed men as well as by all the unthinking, it 
was considered to stand upon an immovable founda- 
tion. The commercial policy that sprung from this 
theory was obvious and well-nigh universal. If gold 
and silver are the only wealth, then by all means 
keep the gold and silver in the country! Get all 
you can in, and let as little as possible out I Accord- 
ingly very early the-uations passed laws to prohibit 
the exportation of gold and silver. We learn from 



16 ELEMENTS OF POLITICAL ECONOMY. 

Cicero, incidentally, that this was done repeatedly at 
Rome. In one of his orations he says, " The Senate 
solemnly decreed both many times previously, and 
again when I was consul, that gold and silver ought 
not to be exported." According to Adam Smith, 
there are ancient acts of the old Scotch Parliament, 
which prohibit under heavy penalties the carrying 
gold and silver forth of the kingdom. The same 
thing was done by France and England, and prob- 
ably by every other nation in Europe. Spain tried 
this experiment of prohibition under noticeable con- 
ditions. She had domestic mines, but also became 
proprietor in the sixteenth century of the rich metal- 
lic treasures of Mexico and Peru. The precious 
metals were literally poured into her bosom. Their 
export she prohibited under the severest penalties. 
The prohibition was largely futile, since these are 
things that can easily be smuggled out. So far as 
the prohibition was effective the metals in conse- 
quence sank rapidly in value. They are only good 
to buy with; and as the Spaniards were not allowed 
to buy with them abroad, they soon found that they 
could buy relatively little with them at home ; which, 
of course, increased the smuggling out. Spain per- 
sisted in this policy until her commercial decay 
proved to her and to all the world, not only the folly 
(.)f such attempts to obstruct the natural current of 
commercial circulation, but also the important truth 
that national wealth consists not in the mere abun- 
dance of gold and silver. Had the Bullion theory 
been correct, to encourage the importation of the pre- 
cious metals, and discourage their exportation, would 
have been the high road to national prosperity. But 



HISTORY OF THE SCIENCE. 17 

the Bullion theory was not correct ; and the clear- 
ness of our views in Political Economy will largely 
depend upon our thorough emancipation from the 
prejudice that gold and silver are any more valuable 
or any more desirable than the products for which 
they exchange. They constitute a part, but only a 
small fractional part, of the values of any country. 

The discovery by the Portuguese of an ocean path 
to the Indies in 1497, and the general waking up of 
the European mind during the next century, gave a 
vast impulse to commerce. On the last day of that 
century, Dec. 31, 1600, Queen Elizabeth chartered 
an exclusive company entitled " The Governor and 
Company of Merchants of London trading into the 
East Indies." They were empowered to export all 
sorts of goods free of duty for four years ; and also 
to export foreign coin or bullion to the amount of 
.£30,000 a year, £6,000 of the same being previously 
coined at the mint ; but they were at the same time 
put under obligation to import, within six months 
after the completion of every voyage except the first, 
the same quantity of silver, gold, and foreign coin 
that they had exported. The enemies of the Com- 
pany soon complained that this last condition was 
not complied with, and that it was, besides, highly 
injurious to the public interest, and contrary to all 
principle, to allow gold and silver to be sent out of 
the kingdom. 

The advocates of the Company, on the other 
hand, though they did not venture to assail the doc- 
trine that wealth consists in gold and silver alone, 
took narrower ground, and asserted that the export 
of money is advantageous, whenever the articles 

2 



IS ELEMENTS OF POLITICAL ECONOMY. 

bought by it and imported, are chiefly reexported to 
other countries and sold for as much money as vvaa 
originally carried out; and also whenever the export 
of coin, and the consequent import of commodities, 
occasions, though indirectly, a greater value of ex- 
ports from home of native products. Thomas Mun, 
a writer of that period, quoted by Adam Smith, 
compares the trade of the merchant exporting gold 
and silver, to the seed-time and harvest of agricul- 
ture. " If we only behold," says he, " the actions 
of the husbandman in the seed-time, when he cast- 
eth away much good corn into the ground, we shall 
account him rather a madman than a husbandman. 
But when we consider his labors in the harvest, 
which is the end of his endeavors, we shall find the 
worth and plentiful increase of his actions." In 
these excuses now set up for the exportation of bull- 
ion we may mark the beginnings of a second general 
commercial theory, which is usually termed the Mer- 
cantile System. This child of the bullion theory be- 
came in turn the cause of the death of its parent. 
The advocates of the East India Company gradually 
learned to take broader ground, and at last boldly 
contended that bullion was nothing but a commod- 
ity, and that its exportation should be made as free 
as that of other commodities. These views gained 
strength ; niany eminent merchants not connected 
with the Company adopted them ; and in 1663, the 
House of Commons repealed the statutes prohibiting 
the exportation of foreign coin and bullion, and gave 
the Company and private traders liberty to expor. 
them in unlimited quantities.^ 

1 M'Culloch's Commercinl Diclionnry, Art. East India Company. 



HISTORY OF THE SCIENCE. 19 

The Mercantile System, though, as compared with 
the previously existing bullion theory, it was a con- 
siderable step in the progress towards sounder opin- 
ions, was itself fallacious in principle and pernicious 
in action. It gave its care, not indeed to prevent the 
direct export of the precious metals, but to make the 
general exports of a country greater than its imports, 
so that a balance should come back in gold and 
silver. The sole aim of the system was to preserve 
what was called the Balance of Trade. A famous 
phrase this, the balance of trade! The legislation, 
the politics, the diplomacy, and the wars, of nearly 
two centuries were full of it. 

By the balance of trade was meant the excess of 
the value of the commodities exported over the 
value of the commodities imported, which excess, it 
was supposed, would always come back in the form 
of gold and silver. Hence unlimited pains were 
taken to make the exports greater than the imports, 
and the excess was regarded as the measure of a 
country's commercial prosperity. Various devices 
were employed to make the exports great and the 
imports little. To increase the amount of exports, 
bounties were offered to domestic producers, to en- 
courage them to sell as much as possible to foreign 
countries. With the same end in view, the raw ma- 
terials of domestic manufactures were forbidden to 
be exported, so that the finished products, thereby 
rendered greater in amount, might help swell the 
exports. Colonies were planted with similar intent, 
that the mother country might find an open market 
there, and swell her exports. To diminish the aggre- 
gate of imports, prohibitions were laid on the bring- 



20 ELEMENTS OF POLITICAL ECONOMT. 

ing in from abroad articles which could be made or 
grown at home ; and heavy restrictions imposed on 
imports from those countries with which the balance 
was supposed to be unfavorable, while the same 
articles, perhaps of an inferior quality, were admit- 
ted on easier terms from countries with which the 
balance was supposed to be better. Thus every- 
thing was sought to be regulated in view of an 
imaginary balance of trade. The Mercantile System 
was the prolific mother of those commercial restric- 
tions, those attempted regulations of manufactures, 
those doctrines of monopoly, of corn-laws, and colo- 
nies, which have fettered industry almost up to the 
present time. 

The particular fallacies that lurk in the Mercantile 
System, and the tortuous and cramping policy that 
grew out of it, will be more fitly discussed at a later 
stage of our inquiries ; this is a proper place to indi- 
cate in general that the whole system is based on a 
misapprehension. It overlooks entirely the mutual 
benefit to the parties of every act of exchange, with- 
out which benefit the exchange clearly would not 
take place at all, and makes the whole advantage of 
commerce consist in a certain balance of gold and 
silver, which comes back to that one of the parties 
which has managed to part with more of its own 
commodities. It seems strange that it did not occur 
to those people, that, if it were worth while to trade 
at all, the benefits of the trade were rather to be 
measured by the amount and value of what was 
received, than by the amount and value of what 
was parted with ! Moreover, the system takes for 
granted, that traders carry forth goods to foreign 



HISTORY OF THE SCIENCE. 21 

countries to receive back goods and bullion worth as 
much, — less goods, indeed, and the balance in bul- 
lion. Why on that principle should the goods be 
carried forth at all ? The labors, the risks, and the 
exchanges all made ; the goods and the balance 
rsceived ; and the country just as well, but no bet- 
ter off than before ! The whole wisdom of the Mer- 
cantile System was to sell as much as possible and 
buy as little as possible, — a wisdom which is evi- 
dent folly, inasmuch as it is not possible to sell with- 
out buying, or to buy without selling. The sound 
reason, that justifies the East India Company in 
exporting the metals or other commodities, and at 
the same time condemns the Mercantile System, is, 
that the goods purchased by the exports are of greater 
worth, when imported, than what was exported to 
pay for them. 

The leading commercial nations of Europe, nev- 
ertheless, fell into the meshes of the Mercantile 
System. Portugal, Spain, France, Holland, and 
England, all gave their attention to the balance of 
trade, all laid restrictions on the natural freedom 
of industry, and all applied the system rigidly to 
their colonial dependencies. These restrictions on 
trade, especially on the importation of manufactured 
goods, and on the exportation of corn and raw mate- 
rials, to say nothing of the bounties which the people 
were taxed to pay, were to the last degree vexatious 
and onerous; while the penalties for their infringe- 
ment were in many cases cruel and even barbarous. 
Various writers in the different countries, and partic- 
ularly in England, where the laws in question were, 
perhaps, the most oppressive, began to attack the mer- 



22 ELEMENTS OF POLITICAL ECONOMY. 

cantile theory and the policy that had grown out of 
it. And it is to this series of writers in long succes- 
sion, some overthrowing one false position, and some 
another, one establishing a truth here and another 
there, that we owe the gradual development and 
present state of the science of Political Economy. 
The science has gradually emerged from the waves 
of thought dashing and roaring around the Mercan- 
tile System. It is still necessary, at least on the 
continent of Europe and in the United States, to 
jombat some of the remains of the old mercantile 
legislation. England is believed to be the only coun- 
try which has erased from her statute-book the last 
vestiges of the system. This she has done in direct 
consequence of the skill and power with which the 
political economists have guided the public opinion 
of that country ; and it is on account of their suc- 
cess, as well as on account of the superior num- 
bers and weight of English thinkers in this field of 
inquiry, that it is proper now to consider first the 
English contributors to the modern science of Politi- 
cal Economy. We shall then attend to what the 
French have done towards building up the science ; 
and, with a few remarks on the Italian and German 
writers, shall close this sketch with a brief recital of 
American views and writers. 

It is not necessary in a book like the present to go 
into rriLUch detail respecting individual authors, or 
their claims to priority of discovery in the realm of 
economical truth. My object is to give a brief but 
just outline of the labors of the principal thinkers, 
with the practical aim of preparing my readers for a 



HISTORY OF THE SCIENCE. 23 

better apprehension of the discussions which follow.^ 
It will be seen that most of the writers fall naturally, 
and without much reference to their nationality, into 
three great schools, according to their conceptions of 
the nature and limits of the science. The founder 
of the first school was Quesnay ; of the second, Adam 
Smith ; and of the third, Condillac, or Whately. 
The distinguishing marks of these schools will pretty 
clearly appear as I proceed. 

Omitting the pamphleteers, who not seldom struck 
upon an important truth here and there in their zeal- 
ous debates on questions of taxation, trade, poor- 
laws, or other point of government policy; and who 
are to be regarded as the pioneers in economical dis- 
covery, pushing their way into the wilderness in one 
direction and another, and thus, as it were, piloting 
the great writers who came after, — John Locke may 
first be mentioned, whose " Two Treatises of Govern- 
ment" were published in 1690, in justification of the 
English Revolution of 1688, in which he incidentally 
illustrates the distinction between utility and value, 
and all but establishes this one of the fundamental 
truths of Political Economy, namely, that value is 
the birth of efTort, and not the gift of Providence. 
He says : — " For it is labor indeed that puts the dif- 
ference of value on everything ; ^^ again: — ^'■What- 
ever bread is worth more than acorns, wine than ivater, 
and cloth or silk than leaves^ skins or moss, that is 
wholly owing- to labor and industry ; " again : — " /j! is 
labor then that puts the greatest part of value upon 
land, without which it would scarcely be worth any- 

1 See for particulars McCulloch's Introduction to Ms excellent edition of 
Adam Smith; Macleod's Dictionary of Political Economy, so far as it has 
appeared; Mucleod's Principles of £cononiical Philosophy , passim ; and 
the Works of tiie various authors referred to. 



24 ELEMENTS OF POLITICAL ECONOMY. 

thiTig ; " and once more : — " Supposing the world 
given, as it was, to the children of men in common, we 
see how labor could make men distinct titles to the sev- 
eral parcels of it for their private usesP^ These pas- 
sages are an early, if not the very earliest, statement 
ot a truth destined in our own day to transform the 
face of the science of economy ; but Locke himself 
was hardly aware of its pregnant nature, and did not 
deduce from it the conclusions which it is well able 
to bear. In the controversy concerning the recoin- 
age of silver money in the same reign, Locke did 
good service by his tracts on money, in preventing 
the lowering of the currency standard, and in diffus- 
ing sound principles (not unmixed with several 
errors) on the nature of money. He justly taught 
that it was as absurd for the State to attempt to fix 
the price of money, as to fix the price of cutlery or 
broadcloth.^ 

David Hume, more distinguished as a historian 
and writer on strictly philosophical subjects, must 
yet be mentioned with honor in any sketch of the 
rise of the science of economy. He was the friend 
and forerunner of Adam Smith. His Political Essays 
were published in 1752. The titles of some of these 
are as follows : — " Of Commerce," " Of Money," 
« Of Interest," « Of the Balance of Trade," « Of the 
Jealousy of Trade," " Of Taxes," " Of Public Cred- 
it.'' In these essays are to be recognized, not only 
the clear-flowing style which makes it always a 
pleasure to read Hume's " History of England," but 
also liberal sentiments largely emancipated from the 
fetters of the mercantile system. The views pro- 

1 Locke, book ii. sections 39, 40, 42, 43. 

2 Maciiulay's England, chap. xxi. 



HISTORY OF THE SCIENCE. 25 

pounded are interesting even where they are not 
sound. Of commerce, he says, " Foreign trade, by 
its imports, furnishes materials for new manufactures : 
and, by its exports, it produces labor in particidar com- 
modities, ivliich coidd not be consumed at home. In 
short, a kingdom that has a large import and export, 
must abound more with industry, than a kingdom that 
rests contented with its own cominodities. It is there- 
fore more powerftd, as well as richer and happier^ 
I am aware of no earlier hint of the great truth 
afterwards fully developed by Say, that there can 
never be a general over-production, than these words 
from the same essay: — "7/" strangers will not take 
any particular commodity of ours, we must cease to 
labor in it. The same hands loill turn themselves to- 
wards some refinement in other commodities which 
may be wanted at home; and there must always be 
materials for them to work upon, till every person in 
the State who possesses riches, enjoys as great plenty 
of home commodities, and those in as great perfection 
as he desires ; which can never possibly happen." 
The absurdity of the then current notions concerning 
the Balance of Trade is triumphantly exposed by 
Hume, in the essay under that title; and in the con- 
clusion of the essay on the Jealousy of Trade, occur 
these noble words : — "J shall therefore venture to 
acknowledge, that, not only as a man, but as a British 
subject, I pray for the flourishing commerce of Ger- 
many, Spain, Italy, and even France itselfV^ Hume 
throws some new light on the subject of Money ; 
although his discussion of it is marred by the as- 
sumption, that a less quantity of the metals would 
answer every purpose of commerce a^ well as a 



26 ELEMENTS OF POLITICAL ECONOMY. 

greater, and have as much value; which would only 
be true on the supposition that the less quantity cost 
as much effort to produce it, and its minuter sub- 
divisions were as convenient in exchange ; — a false 
assumption from which he deduces this very false 
inference: — " Were all our money ^ for instance^ re- 
comedy and a "penny's worth of silver taken from every 
shilling, the neiu shilling' would probably purchase 
everything that coidd have been bought by the old; 
and domestic industry, by the circulation of a great 
number of pounds and shillings, ivould receive some 
increase and encouragement.''^ Are men, then, usu- 
ally willing to consider \\ equal to j|? Besides, 
Hume did not attempt to analyze value, or to ground 
comprehensively the science of Political Economy. 
So far as Great Britain is concerned, that attempt 
was first made by Dr. Adam Smith, who published 
in 1776 his great work on the " Wealth of Nations," 
in which many of the more important propositions 
of the science are established beyond the reach of 
controversy. Between 1752 and 1763, he had been 
Professor of Moral Philosophy in the University of 
Glasgow ; in that capacity, he had delivered lectures 
on natural theology, ethics, jurisprudence, and public 
economy ; the lectures on ethics were developed into 
his " Theory of the Moral Sentiments," published in 
1759 ; it is supposed that the lectures on public 
economy formed the nucleus of his "Wealth of 
Nations," as it is known that he advocated in them 
the doctrine of Free Trade, which was at that time 
also very popular in France; in 1763, he went to 
France, where he resided for three years, and be- 
came very intimate with Quesnay, whose subsequent 



HISTORY OF THE SCIENCE. 27 

death alone prevented the dedication to him of the 
" Wealth of Nations," so that Dr. Smith was not 
only familiar with the doctrines of Quesnay but also 
allowed them to color many parts of his book ; and 
the ten years between 1766 and the date of its 
publication were occupied by him in retirement in 
its preparation. It will be noticed that the pub- 
lication of this work took place in the very year 
in which American Independence was declared ; 
and it was itself a sort of declaration of inde- 
pendence of the false principles and foolish pol- 
icy of the Mercantile System. Like the document 
of Jefferson, it excited universal attention : like that, 
it marks an era ; and the results in the economical 
world of the treatise of Smith have been scarcely 
less sti'iking and beneficent than the results in the 
political w^orld of the document of Jefferson. In- 
deed, the merits and originality of Dr. Smith are so 
great, that he has frequently been called, as Aristotle 
has been by others, the father of Political Economy. 
It is not just that that title should be borne by either 
the one or the other; the science has grown up very 
gradually, and through the contributions of a great 
many thinkers; but the most prominent name among 
them all is now, and doubtless always will be, the 
name of Adam Smith. He goes over most of the 
ground that properly belongs to Political Economy, 
expressly admits in one place that the "natural and 
acquired abilities" of individuals are a part of the 
wealth of the nation, and in another that bank-notes, 
bills of exchange, and other instruments of credit 
are a part of capital; he endeavors to bring the prin- 
ciples discovered by others and those first demon- 



28 ELEMENTS OF POLITICAL ECONOMY. 

strated by himself into one system, and by means 
of historical information to make his book as inter- 
esting as it is instructive by reason of its scientific 
discussions ; he maintains, in opposition to Q,ues- 
nay, that labor, and not simply the physical earth, is 
a source of wealth, and also that in commerce botli 
sides gain; he exalts labor, shows the immense ad- 
vantages of its division, advocates its unshackled 
freedom, and classes artisans, manufacturers, mer- 
chants, and traders as productive laborers; he unfolds 
the benefits of commerce, and mercilessly exposes 
the weak points of the restrictive and regulating 
devices of the mercantile system ; and he discusses 
money, capital, profits, wages, rent, taxation, and 
public expenditures. Mr. Buckle affirms that "Adam 
Smith contributed more, by the publication of this 
single work, towards the happiness of man, than has 
been effected by the united abilities of all the states- 
men and legislators of whom history has preserved 
an authentic account." A book with such a scope, 
and published at such a time, of course contains 
many errors ; but the wonder is, not that there are 
so many, but that there are not more. A ground- 
less distinction still kept up between productive and 
unproductive labor; a strong tendency to regard 
material commodities as alone possessed of value, 
and labor as the only cause of value; a failure to 
carry out to their practical consequences admissions 
and distinctions which he himself makes, — as when, 
for example, he distinguishes utility and value as 
" value in use and value in exchange;" a remarkable 
lack throughout of clear definitions, and a conse- 
quent partial confusion in his use of the terms 



HISTORY OF THE SCIENCE. 29 

Wealth and Value, and in the doctrines dependent 
on these ; a preference still given to agriculture over 
other forms of production, and to the home trade 
over foreign trade ; a misapprehension in regard to 
the nature of rent ; occasional inconsistencies with 
his own principles, as when allowing that a State 
may regulate the rate of interest, and that some 
wines bear a high price on account of their scarcity 
and fashionableness ; a confused arrangement of the 
topics discussed ; and lastly, a prolixity that at times 
becomes tedious ; are among the chief defects of 
Smith's "Wealth of Nations." 

Most of the English writers on this subject, since 
the time of Dr. Smith, may be fairly said to belong 
to his school. They have corrected some of his 
errors and perpetuated others of them, have made 
additional contributions to the science in several 
respects, but in the main have followed out his prin- 
ciples, — like him, for the most part, confining their 
discussions of value to material commodities, regard- 
ing labor rather than desire as the cause of value, 
ignoring personal services as such, and, till recently, 
giving little attention to the great subject of credit. 
Mr. Malthus, author of a very famous theory of 
population ; Mr. Ricardo, author of a scarcely less 
famous theory of rent, — both of which theories will 
be considered further on in these pages ; Mr. McCul- 
loch, a copious and very useful writer, who clearly 
discriminates between utility and value, but errone- 
ously regards labor as the sole constituent in the 
latter ; Mr. Senior, author of the able, but not suffi- 
ciently comprehensive, treatise in the " Encyclopedia 
Metropolitana ;" and Mr. John Stuart Mill, whose 



30 ELEMENTS OF POLITICAL ECONOMY. 

Tecent death has been so much deplored, and whose 
book has been widely and deservedly read in both 
hemispheres, but who with all his logical power was 
not always consistent with himself, who attempted 
to rear the superstructure of our science upon quite 
too narrow foundations, and who made an unneces- 
sary and unlucky admission in regard to protective 
tariffs, which the enemies of Free Trade have been 
prompt to quote against him and his whole school ; 
are the principal figures in the long array of writers 
of this school. They have the great reputation that 
attends indubitable success. They have put the doc- 
trines of Free Trade upon an immovable basis in 
England, and thus exerted a potential influence 
towards their establishment throughout the world. 
The definition of the science, to which, in general, 
they would all assent, is, The science which treats 
of the Production, Distribution, and Consumption 
of Wealth. 

Mr. Horner, Mr. Thornton, and Mr. Huskisson, 
were the joint authors of the Bullion Report made 
to Parliament in 1810, in which the true principles 
of metallic and of paper money are stated with 
demonstrative ability. Since the passage of the 
Bank Act of 1844, English writers have given a 
great deal of attention to the theory of credit. Mr. 
Macleod's '* Theory and Practice of Banking," Mr. 
[Patterson's " Economy of Capital," Mr. Bonamy 
Price's '"' Principles of Currency,'' Mr. Hankey, Mr. 
Lawson, and an able anonymous author, all " On the 
Bank of England," are very useful books. Mr. Faw- 
cett's " Political Economy " would deserve to be 
noticed in any case, but becomes remarkable when 



HISTORY OF THE SCIENCE. 81 

it is remembered that the author is blind. Mr. 
Jevons, of Manchester, is an economic writer of 
great originality and of severe scientific method; but 
he seems to me to err in making the science too 
exactly mathematical and formal. 

Mr. Macleod, the latest English author of note in 
this field of inquiry, the first volume of whose " Prin- 
ciples of Economical Philosophy" appeared in 1872, 
is a very able, and almost the only recent English, 
representative of the third school of economists, soon 
to be characterized. Their definition of the science 
is the one enforced in these pages also, namely. The 
Science of Exchanges. This definition is drawing to 
itself the most recent investigators in France, Eng- 
land, and America ; and the scientific development 
of it has already put political economy into a new 
and better posture. According to this view, ex- 
changeability is the only quality requisite to bring 
any service, commodity, or claim within the sphere 
of economic regulation. Several editions of the 
present treatise had been issued before I had seen 
any of Mr. Macleod's books, and to the numerous 
points of our independent coincidence have been 
added, in my later editions, many points of infor- 
mation in matters of fact, and some distinctions in 
matters of science, for which I wish to express my 
obligations to him. 

If the French have done less than the English in 
building up the science of Political Economy, they 
have done well what they have done. They have 
the honor of publishing the very first general treatise 
under the title of " Political Economy." It was issued 
at Rouen in 1615. To them also is due the credit 



32 ELEMENTS OF POLITICAL ECONOMY. 

of having furnished the first writer who undertook 
a systematic analysis of the sources of value, and 
whose ingenious speculations gave rise to the first 
school of Political Economy. This was M. Q,ues- 
nay, a physician attached to the court of Louis XV., 
whose book was published in 1758.^ His funda- 
mental positions expressed the reaction from the 
principles of the Mercantile System as embodied in 
the policy of Colbert, the famous finance minister of 
Louis XIV. That policy gave a decided preference 
to the industry of the towns and cities. M. Ques- 
nay appeared as the champion of agriculture. His 
system assumes that the physical earth is the only 
source of wealth, and consequently that labor is 
incapable of producing any new value except when 
employed in agriculture. Artisans and raerchanta 
are unproductive laborers, because there is no nett 
produce remaining, as in agriculture, over and abovo 
the expenses of production. The system mistook 
ihe nature of rent; and falsely though tacitly as- 
sumed that wealth consists in matter. The novelty 
of the theory however, its scientific shape, and the 
libera] commercial policy coupled with it, gave it for 
a time a great reputation ; and it numbered among 
its disciples no less persons than Turgot, the finan- 
cier, and the elder Mirabeau. The former, when he 
became controller-general of the French finances in 
1774, proposed, in accordance with the principles of 
Quesnay, the freedom of labor at home and of trade 
abroad, and the substitution for existing taxes on a 
multitude of articles, of a single tax on land ; and the 
latter was so far carried away by zeal for his master, 

1 Adam Smith, Book iv., chap. ix. 



HISTORY OF THE SCIENCE. 33 

that he puts his work, in point of benefit to mankind, 
on a level with the invention of writing and the in- 
vention of money. The numerous disciples of Q,ues- 
nay were called Physiocrats, and exerted so power- 
ful an influence in France, that in 1786, William 
Pitt had little difficulty in concluding with the 
French Government a Treaty of Commerce and 
Navigation, by which was established, on the pay- 
ment of moderate duties, "reciprocal and entirely 
perfect liberty of navigation and commerce between 
the subjects of each party in all and every the king- 
doms, states, provinces, and territories, subject to 
their majesties in Europe for all and singular kind 
of goods in these places." This excellent treaty was 
soon swept away by the oncoming of the French 
Revolution, in whose councils nevertheless the prin- 
ciples of the Physiocrats held a strong sway, as is 
especially seen in the decree for the equal division 
of lands, which has been the strength of France ever 
since. The system of the Physiocrats is sometimes 
named the "Agricultural System" in distinction 
from the Mercantile System. 

To make the year 1776 doubly memorable in the 
history of this science, the French philosopher Con- 
dillac published in that year a work entitled "Le 
Commerce et le gouvernement consideres relativement 
run a Vautre^ This work was comparatively neg^ 
lected at the time, and has never shared the popular 
favor accorded to the other writings of the same au- 
thor, but the definition of the science given in it, 
namely, that it is the science of commerce, found 
many years afterwards an intelligent champion in 
Archbishop Whateiy, to whom the definition is com- 



34 ELEMENTS OP POLITICAL ECONOMY. 

monly and perhaps properly referred ; and they must 
be regarded as the founders of the third great school 
of political economists, whose most distinguished 
modern representatives have been Bastiat in France 
and Macleod in England. In his lectures delivered 
at Oxford in 1831, Whately proposed as a good 
name for our science the term Catallactics, the 
science of exchanges ; very recently Macleod has 
proposed the term Economics ; it is not likely that 
either the one or the other will ever supersede the 
old Aristotelian term. 

In 1803, appeared in Paris, Say's " Traite cPecono- 
mie politique,^' which soon became, and is even yet, a 
standard work. Say is a skilful expositor of the sci- 
ence, an able advocate of the freedom of commerce, 
and the original contributor of the important demon- 
stration that there cannot be a general glut of prod- 
ucts — a general over-production. His doctrine of 
value, however, is infected with a fundamental error, 
namely, the confusion of value with utility, which 
one of his own countrymen was destined completely 
to expose, and to replace with the nucleus of satisfac- 
tory truth. Say is rather a follower of Adam Smith 
than of Condillac, and belongs accordingly rather to 
the second than the third school of political econ- 
omists. 

Frederic Bastiat, who had previously shown him- 
self a. powerful champion of Free Trade, and the 
most formidable antagonist of Socialism in France, 
published in Paris in 1850 a book entitled " Har- 
monies economiques," which carried Political Econ- 
omy to a very advanced position, and is the most 
important contribution to the science since the time 



HISTORY OP THE SCIENCE. 35 

of Adam Smith. The gifted author died the same 
year in which his book appeared, leaving unfin- 
ished an intention to recast and complete it. It is 
not strictly a treatise of Political Economy, as it 
does not touch upon several of the most important 
subjects comprehended in that title, such as Money, 
Foreign Trade, Taxation, and others, but there is in 
it a masterly definition and exposition of value, and 
a vigorous demonstration of the harmonious mechan- 
ism of society, by which, through the agency of lib- 
erty and property, God has designed the progressive 
amelioration of mankind. " All legitimate interesta 
are in harmony " is the key-note of the book. Bas- 
tiat encumbers his discussions by the attempt to use 
technically the term " wealth," and his chapter under 
that title is singularly perplexed and confused, afford- 
ing again for the hundredth time an illustration of 
the impossibility of using that word to advantage 
for any scientific purpose whatever* While unfold- 
ing the laws of value in their manifold applications, 
Bastiat incidentally but most effectually demolishes 
the vagaries of communism, and establishes the right 
of property upon unassailable grounds. It is a 
pleasure to acknowledge in the amplest manner one's 
indebtedness to such a quickening writer as M. Bas- 
tiat is. Whoever will compare carefully with his 
book the following chapters on Value and Land, 
will see how much I have profited by his discus- 
sions; and he will also see that I have made an 
independent, not a servile, use of them. It is hoped 
that the relations of utility to value are even more 
clearly and ultimately put than he has put them. 
Not to have availed myself of the truths Avhich he 



S6 ELEMENTS OF POLITICAL ECONOMY. 

has actually established would be as unjust to sci- 
ence, as not also to have endeavored in the chapters 
on Exchange and Foreign Trade to execute the com- 
mission which he left to his readers in these words : 
— ^^ I hope yet to find at least one among them who 
will he able to demonstrate rigorously this proposition : 
the good of each tends to the good of all, as the good 
of all tends to the good of each ; and who will, more- 
over, he able to impress this truth upon menHs minds by 
rendering the proof of it simple, lucid, and irrefrag- 
able^ 1 M. Bastiat defines Political Economy as the 
Theory of Exchange, and Value as the Relation be- 
tween two Services exchanged. His system turns 
on the technical use, definition, and analysis of the 
term Services. He derives all the economic phenom- 
ena out of the fundamental facts of human Wants, 
Efforts, and Satisfactions. Value cannot exist sep- 
arately from human efforts. Utility resides in the 
materials and forces of Nature. " But these natural 
forces, in themselves, and apart from all intellectual or 
bodily exertion, are gratuitous gifts of Providence^ 
and. in this respect they remain destitute of value 
through all the complications of human transactions. 
This is the leading idea of the present workP Thus 
he himself expresses the matter.^ 

Michel Chevalier, Professor of Political Economy 
in the College of France, a friend and disciple of 
Bastiat, very distinguished for his part in negotiating 
the commercial treaty with England in 1860, is the 
most prominent living economist in France. 

The Italian writers, though voluminous and re- 

1 Stirling's Translation of the Jlarmome.s, page 92. 
'^ Stirling's Translation, page 62. 



HISTORY OM THE SUIENCE. 37 

spectable, have originated comparatively little within 
the field of this science. The earliest of them in- 
vestigated especially the nature of money, and came 
to the sound conclusion that governments have no 
right to tamper with the standard of value used by 
their subjects. Italy too, as well as France and 
England, felt the strong reaction against the Mer- 
cantile System during the latter half of the eigh- 
teenth century. In 1764, the first professorship of 
Political Economy ever established was instituted 
at Naples, and Antonio Genovesi was appointed to 
lecture in it. He was an ardent Free Trader. So 
also was Beccaria, appointed to a similar professor- 
ship instituted in Milan in 1768. So also was their 
contemporary Verri. A collection of the best Italian 
wa-iters on the subject was undertaken, under the 
patronage of Napoleon, in 1803, and subsequently 
completed in fifty volumes octavo. 

The Germans have done more perhaps for the 
science of economy through their public action in 
the ZoUverein, than through the private contributions 
of their numerous economical writers. The ZoUve- 
rein, or Customs Union, was commenced by Prussia 
in 1818, and has received the adhesion from time to 
time of other German States, until now it embraces 
all of Germany except Austria. Within this broad 
territory, embracing a population of above 38,000,000, 
the duties on imports are uniform, and uniformly 
low; and there is no duty on exports except on 
paper-rags.i All interior custom-houses are swept 
fAvay. No foreign articles are excluded ; many are 
admitted free of duty; and those on which duty is 
charged are arranged in thirty-seven simple classes, 

1 ZoUtarif des Deutschen ZoUvereins vom 1. Juni 18G8 ab Riiltig. 



38 ELEMENTS OF POLITICAL ECONOMY. 

the duties being always specific (generally by the 
hundred weight), except in the case of carriages and 
ships, on which the duty varies from five to ten per 
cent, of value. The commercial prosperity induced 
by these liberal regulations, the steadily enlarging 
revenue from these low duties, and the growth of 
domestic industry by the side of these practically 
unrestricted importations, have taught the world a 
more valuable lesson than often falls to the lot of an 
individual thinker to teach. Seeing these undoubted 
advantages, Austria has concluded a similar ZoU- 
verein with her dependent states, Hungary and Dal- 
matia, covering in all 35,000,000 souls, and with 
similarly gratifying results. Their tariff classes are 
only twenty-two in number, and their duties on im- 
ports amounted in 1871 to 23,522,156 florins. The 
German Zollverein has lately made liberal com- 
mercial treaties with Austria, Italy, and Spain, and 
is managed by a customs' parliament chosen on 
the principle of universal suffrage by the people 
included in the confederation. It is true that the 
founders of the Zollverein were not wholly free from 
the prejudices of the mercantile system, but the re- 
sults of the experiment so far confirm anything 
rather than the principles of that system. Friede- 
rich List, an early champion of the Zollverein, some 
time also a resident of the United States, who pub- 
lished in English his " Outlines of a New System of 
Political. Economy," at Philadelphia, 1827, and "i)a5 
Nationale System der politischen Oekonn7nie" in 
Stuttgai-t, 1841, and who, while advocating the prin- 
ciple of protection in his books, displayed a multifa- 
rious activity in behalf of many liberal schemes? 



HISTORY OF THE SCIENCE. 39 

Ludwig Stein, Professor in Vienna, an indefatigable 
writer and zealous free trader; and Professor Rau, 
of Heidelberg, a correct and forcible writer and a 
popular lecturer, may suffice, as examples merely, of 
the individual -writers of Germany. 

The circumstances of the United States, as well 
in colonial vassalage as in an independent position, 
their experience with almost every, variety of paper 
money, the alternations of the national policy in 
respect to trade, the long continued public discus- 
sions on the tendencies and results of a protective 
tariff, and the efforts — State and National — which 
have been made towards realizing a healthful cur- 
rency, have been favorable to the cultivation of 
economical studies. To these circumstances may 
now be added the pressure of a vast public debt, the 
opportunity of watching the operation of a national 
banking system, and the interest attaching to the 
production of gold and silv^er in the western half of 
the continent. Attention to this subject, however 
great heretofore, is likely to be greater in the time to 
come. 

The Reports of the Secretaries of the Treasury, 
particularly those of Mr. Hamilton, Mr. Gallatin, Mr. 
Walker, and Mr. McCulloch, have treated many 
branches of the subject with marked ability. Much 
economical truth has been brought out also in con- 
gressional speeches, for example, in those of Mr. 
Webster, Mr. Calhoun, Mr. Benton, Mr. Silas 
Wright, and more recently Mr. Garfield and Mr. S. 
S. Cox ; but it cannot be said that the usual action 
of Congress has been guided by much economical 
wisdom. Late debates on the tariff and on the cur- 



40 ELEMENTS OF POLITICAL ECONOMY. 

rency have shown, however, on the part of some 
members of both houses, a thorough comprehension 
of the principles that underlie those questions. Con- 
gressional reports, like that of John Q,uincy Adams 
on Weights and Measures, have illustrated portions 
of the subject. Mr. David A. Wells, as Special 
Commissioner of the Revenue, has presented such 
facts and reasonings in relation to the national in- 
dustry, commerce, and currency, as have deserved 
and have received the profound attention of the 
people. The census of 1870, prepared under the 
superintendency of Gen. F. A. Walker, is a thesaurus 
of facts useful for economical illustration. Writers 
on economical subjects for the press have exerted a 
a large influence; I mention, by way of example 
merely, John Y. Smith of Wisconsin, Horace White 
of Chicago, S. R. Reed of Cincinnati, Isaac Butts 
of Rochester, Parke Godwin, E. L. Godkin, and 
Mr. Stone of New York. Treatises more or less 
formal and complete have been written by Daniel 
Raymond (1820), John Rae (1834), Henry C. Carey 
(1835-1860), Professor Vethake, President Wayland, 
Stephen Col well, George Opdyke, Professor Bo wen, 
E. Peshine Smith, Professor Bascom (1859), Charles 
Moran (1860), E. B. Bigelovv (1861), Amasa Walker 
(1866), John A. Ferris (1867), George A. Potter 
(1868), E. G. Spaulding (1869), Horace Greeley 
(1870), W. M. Grosvenor (1871), William Elder 
(1872), and by others. Most of the above writers 
may be reckoned to belong to the second great 
school of economists. 

The economical works of Mr. Carey are to be no- 
ticed the more particularly, because he claims as 
original with himself some of the fundamental posi- 



HISTORY OF TUE SCIENCE. 41 

tions of M. Bastiat. It is certain that these position? 
are common to the two writers ; and it is to be pre- 
sumed that M. Bastiat profited by some of the views 
of Mr. Carey ; but there is enough that is distinctive 
in the two authors to justify the claim of each to 
both originality and merit. Among Mr. Carey's 
central principles may be enumerated the following: 
That land gains its value from labor ; that, generally, 
poorer soils are first cultivated, then, tiiose more fer- 
tile and difficult ; that, what would be the cost of 
their reproduction rather than their actual cost of 
production, determines the value of commodities ; 
that the interests of classes and individuals are really 
harmonious ; that there is a tendency to increase in 
the wages of labor, and to diminution in the rate, 
though increase in the aggregate of the profits of 
capital ; that the advancement of society corresponds 
to the degrees of association and liberty in it ; and 
that the prices of land, labor and raw materials tend 
to approach the prices of finished commodities, 

Mr. Amasa Walker's " Science of Wealth " has 
already passed through several editions, and is a 
very high authority on all questions of Political 
Economy. On the subject of Currency it is par- 
ticularly original and full. Wages, Trade, and Tax- 
ation are also subjected in it to admirable analysis 
and discussion. 

A second edition of Professor Bowen's " American 
Political Economy" has been recently published. 
As his treatment of the various questions of Money 
was the strong point in the original edition of 1856, 
so his copious discussion of the recent financial ex- 
perience of the United States constitutes a chief 
m.erit in the book as it now appears. 



42 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER II. 

FIELD OF THE SCIENCE. 

In the preceding chapter on the History of the 
Science, I have used the terra " Science " without 
strictly defining it. It is time now to inquire ex- 
actly what a science is in general, and what is the 
precise field of the science of Political Economy in 
particular. 

A Science is the body of exact definitions and sound 
principles educed from and applied to a single class 
of facts or phenomena. 

There must be a class of facts before there can be 
a science of them; and the conception or definition 
must include everything that possesses the quality 
that is the subject of investigation. In other words, 
the terms of a science are general, and not partic- 
ular. From the very nature and purpose of a 
science, as well as from the mode in which alone it 
can be built up, it cannot tolerate facts that come 
partially but not completely under its fundamental 
definition. This definition must strictly constitute 
a class of things, that is, include all things that 
really, for the purposes of the investigation, belong- 
together. Thus arithmetic, as the science of num- 
ber, must be inclusive of all things whatsoever thai 
can be numbered; while the other qualities of those 
very things, besides number, may well subject them 



FIELD OF THE SCIENCE. 43 

to still other sciences. So, if Political Economy be 
the science of exchanges, it must include in its 
scientific view all things whatsoever that are eco- 
nomically exchanged. Exchangeability will be the 
quality that constitutes the class of things with 
which the science is conversant. There is such a 
class of things ; and accordingly, Political Economy 
possesses the first grand condition of a science. 

There are two processes concerned in the building 
up of sciences, namely, first, Induction, and second. 
Deduction. Induction is the process by which we 
pass from less to more inclusive propositions; and 
Deduction is the process by which we pass from 
more to less inclusive propositions. The subsidiary 
process of Verification must of course accompany 
the two fundamental processes, in order to make 
sure that they have been correctly performed ; but 
verification itself is nothing but a new induction or 
deduction, in different terms, made to test the valid- 
ity of the former one. With the exception of pure 
Mathematics and the formal Logic, which are wholly 
deductive, all sciences appear to be both inductive 
and deductive in their methods; and this is certainlv 
the case with Political Economy, which offers an 
ample field for both processes. Its present defini- 
tions and principles have been slowly reached by 
unnumbered inductions from particular facts, as well 
as through unnumbered corrections and verifications 
secured by deduction from principles accepted at the 
time. The two processes go on hand in hand at 
every step. If the science be not now one of as- 
sured position and of commanding influence, it is 
not because the processes by which other great 



44 ELEMENTS OF POLITICAL ECONOMY. 

sciences have been built up are not equally open to 
this, nor because the facts which it surveys, which 
have been and are of vast consequence to the wel- 
fare of mankind, do not lie in a definite and accessi- 
ble field. 

Lord Bacon was the author of the true doctrine 
of Generalization, that is to say, of the method of 
building up sciences. If he himself put more em- 
phasis on the inductive part, that is, on the gather- 
ing up of general definitions and propositions from 
particular instances, it was owing to the reaction 
from the opinions and practice of his time ; never- 
theless, he did not neglect the deductive part, that 
is, the application of general principles inductively 
obtained to the explanation of new cases. He says: 
"Axioms duly and orderly formed from particulars 
easily discover the way to new particulars, and thus 
render sciences active." ^ Political Economy is one 
of the most fortunate of the sciences, in that it 
offers, in the commercial experience of all nations, 
and in the constantly recurring examples of ex- 
change under the widest possible variety of other 
circumstances, abundant opportunities to frame in- 
ductively and test deductively every one of its defi- 
nitions and propositions. Experience is to this 
science what experiment is to some of the other 
sciences. It has also a great resource in feigned 
cases,Avhich, provided only that they be cases pos- 
sible to occur, afford a potent and often available 
means of educing or testing its principles.^ Political 
Economy, accordingly, richly possesses the second 
of the conditions of a great science. 

1 Novum Organon, i. 24, quoted by Mr. Macleod. 

2 See Macleod's Economical PMlosophy, p. 27. 



FIELD OF THE SCIENCE. 45 

Sciences may be divided into physical and moral 
sciences. Physical sciences are those concerned with 
the classifications and laws of action belonging to 
material substances ; while moral sciences are those 
concerned with the classifications and laws of action 
belonging to beings possessed of desires and of will. 
In the sense of this distinction, Political Economy 
is a moral science ; inasmuch as it is exclusively 
concerned with those circumstances and actions of 
men, which find their end in the determination of 
value; and since, as will be abundantly shown here- 
after, no value was ever determined, or ever can be, 
except through the desires and will of men. It so 
happens also, that while there is much in the con- 
duct of all men that is variable and uncertain be- 
forehand owing to their free will, that part of their 
conduct that is related to the creation of values has 
been observed to be, under given conditions, remark- 
ably uniform in all ages and countries. The desire 
to possess, the impulse to exchange, the repugnance 
to labor except in view of a return, the pressure of 
recurring wants, and the satisfaction experienced 
when these wants are met, are the most certain and 
universal attributes of human nature ; they are all 
open to observation and experience ; the strength of 
the impulses is capable of being measured through 
their results, and of being expressed numerically ; 
and, accordingly, of all the moral sciences, Political 
Economy is that one, which has, perhaps, the broad- 
est and firmest footing, which is already the most 
fully developed, and whose chief propositions are 
least likely to be overturned by any probable changes 
of the future. Its methods arc entirely similar to 



46 ELEMENTS OF POLITICAL ECONOMY. 

those of the chief physical sciences, and its main 
conclusions scarcely, if any, less secure than theirs. 

There is, however, another current sense of the 
word " moral," in which Political Economy is not a 
moral science at all; and that is the sense in which 
it is used as synonymous with " ethical," or " oblig- 
atory." Paley defines Ethics as " the science of 
Duty and the reasons of it;" and it is in this ethical 
sense that we speak of the science of Morals. Now, 
this idea of obligation, on which the science of 
morals is founded, and the idea of value on which 
the science of economy is founded, are totally dis- 
■ tinct ideas. There is one word that marks and cir- 
cumscribes the field of morals. That word is Ous^ht. 
There is one word that marks and circumscribes the 
field of economy. That word is Value. Political 
Economy does not aspire to place its feet upon the 
ponderous imperatives of moral obligation. It findj^ 
a solid and adequate footing upon the expedient and 
the useful. As a science, it does and must discuss 
and decide all questions upon economical grounds 
alone. As a science, it has no concern with ques- 
tions of moral right. If it favors morality, it does so 
because morality favors production. It favors hon- 
esty because honesty favors exchange. It puts the 
seal of the market upon all the virtues. It condemns 
slavery, not because slavery is morally wrong, but 
because it is economically ruinous. Moral science 
appeals only to an enlightened conscience, and cer- 
tain conduct is approved because it is right, and for 
no other reason. Political Economy appeals only 
to an enlightened self-interest, and exchanges are 
made because they arc mutually advantageous, and 



FIELD OF THE SCIEKGE. 47 

for no other reason. Each of the two sciences, there- 
fore, has a distinct basis and sphere of its own. The 
grounds of Economy and morals are independent and 
incommensurable. 

Every science, however, has its points of contact 
with other sciences ; and this is particularly the case 
with Political Economy in relation to moral science, 
and is the reason why the two have sometimes 
been confounded. The sound conclusions of the one 
are harmonious with the sound conclusions of the 
olher. Both work together for the good of men, for 
the amelioration of their condition. Their spheres, 
though distinct, nevertheless touch each other. Duty 
and interest lie alongside. The ultimate analysis 
of property, for example, will, as we shall see, lead 
the inquirer into the higher region of moral science. 
In legislation also, the question is frequently at the 
same time an economical and a moral question. Dr. 
Wayland has observed that " almost every question 
of the one science may be argued on grounds belong- 
ing to the other." But the grounds themselves, it is 
important to remark, must be seen to be, and must 
be kept, distinct. 

In the next place, the very name of the science in- 
dicates that it is a political, that is, a social science. 
It relates to men in a state of society, and not to 
men in a state of isolation. The hermit, who neither 
buys nor sells, who neither gives nor receives any- 
thing in exchange, is not amenable to the laws of 
Political Economy. So far as men satisfy their own 
wants by their own efforts without exchange, they 
stand outside the pale of this science. Under those 
circumstances the idea of value could neither have 



48 ELEMENTS OF POLITICAL ECONOMY. 

birth nor being, and of course there would be no 
such thing as a science of value. Robinson Crusoe 
came to lead a very tolerable life upon his desolate 
island by means of his own industry. He worked, 
but then he worked to satisfy his own wants directly. 
He did everything for himself. He had no oppor- 
tunity to buy anything, sell anything, exchange any- 
thing. The whole course of such a life could never 
have developed the idea of value, and the record of 
the whole experience of such a solitary individual 
would require no such word as value. If God had 
made men so that their varied wants would best be 
met by applying their own efforts to satisfy these 
wants directly, without the intervention of exchange, 
there would have been, there could have been, no 
such science as the one to which attention is now di- 
rected. In that case, men would live, if they lived 
at all, in perfect isolation. Every man would satisfy 
his own desires by his own efforts. There would be 
no society, and no exchange. 

But it is evident at the very first glance, that the 
Creator has not made men thus. Society is God's 
handiwork. It is the most complicated and the 
most wonderful, as it was the final, work of his 
bands. The first man, as he stood alone in Para- 
dise, was indeed a wonderful structure, — wonderful 
in his body, and in all his mental and spiritual pow- 
ers. " But it was not good that the man should be 
alone. Society must be provided for ; and in pro- 
viding for a society of human beings, God impressed 
upon that organization, as upon all others, its own 
proper and peculiar laws. These laws embrace its 
entire organization, in its lower, as well as in its 



FIELD OF THE SCIENCE. 49 

higher, parts. They cover the phenomena of ex- 
change, just as they cover the phenomena of morals ; 
and no intelligent observer can watch their working, 
when left intact and free, without being stimulated 
and gladdened by the beneficent results to which 
they lead. If the footsteps of providential intelli- 
gence be found anywhere upon this earth, if proofs 
of God's goodness be anywhere discernible, they are 
discernible, and are found in the fundamental laws 
of society. Certainly, if every man could satisfy all 
his desires as well, by putting forth his efforts to that 
end directly, he would do it. He would grow his 
own food, make his own clothes, write and publish 
his own newspaper, be his own doctor, in one word, 
perform all needed services for himself. But God 
has so oiriered it that he cannot do this. He cannot, 
in a state of isolation, with all his efforts, procure for 
himself one thousandth part of the comforts which 
he easily procures for himself by less efforts, througn 
exchange. Society and exchange are, under God's 
ordination, matters of necessity, if men are to rise in 
a scale of comforts perceptibly above the brutes. 
And the reason is this. There are obstacles, in all 
directions, to the satisfaction of men's desires K 
the desires are to be met, these obstacles are to be 
surmounted. But if one man undertakes to sur- 
mount any considerable number of these obstacles, 
he miserably fails. His powers are not adequate to 
the task ; and hence we say, that in a state of isola- 
tion, men's wants exceed their powers. But, if he 
devote himself to surmounting one class of obstacles, 
as, for instance, those in the way of procuring suita- 
ble clothing, his powers are adequate to this, he soon 

4 



50 ELEMENTS OF POLITICAL ECOMOMY. 

acquires skill in it, he learns to avail himself of the 
gratuitous help of Nature, and the facilitating pro- 
cesses of art, he is able to realize large products along 
his line, and is now in position to offer valuable ser- 
vices to society. Meanwhile other men have been 
devoting themselves each to another class of obsta- 
cles, have concentrated effort and skill upon them, 
have succeeded by the help of Nature and art in sur- 
mounting them, and now offer their valuable services 
to society. 

Now, then, these services are mutually exchanged 
in all directions, and men find, as it is God's clear 
design that they should find, that, by making given 
efforts along one line, and exchanging them for cor- 
responding efforts along other lines, they obtain vast- 
ly greater satisfactions for their various desires than 
they could obtain by direct effort. Why ? Because 
there is now a vast increase of useful products in 
existence. Here we have reached, provisionally, the 
true explanation of the gains of exchange. It is not 
so much that by exchange men get better and cheaper 
articles, as it is that they get more of them. By 
the division of employments, which is only possible 
under a system of exchange ; by the fact that, under 
free exchange, men avail themselves of all the varied 
advantages of Nature and position ; the number and 
variety _of useful products created, the number and 
variety of the services which mejti are able to render 
to each other, are immeasurably augmented. More 
is produced, more is to be exchanged, and therefore 
there are more satisfactions of all men's desires. 
Political Economy, therefore, which unfolds the rea- 
sons and the laws of exchange, finds its only field 



FIELD OF THE SCIENCE. 51 

in a state of society. It is truly a political, that is, 
a social science. 

In determining now more definitely still the field 
of our science, we will look at some of the leading 
definitions of it which have been given by different 
writers. Mr. Senior defines it " the science which 
treats of the nature, the production, and the distri- 
bution of wealth." Mr. McCuUoch regards it "the 
science of the laws which regulate the production of 
those material products which have exchangeable 
value, and which are either necessary, useful, or 
agreeable to man." Archbishop Whately gives it 
the name of " catalactics, or the science of ex- 
changes." Among several equivalent definitions 
which he is at pains to give, Mr. Mill places first, — 
' the science which treats of the production and 
distribution of wealth, so far as they depend upon 
the laws of human nature." The French writers 
give definitions somewhat broader. M. Storch says 
it " is the science of the natural laws which deter- 
mine the prosperity of nations, that is to say, their 
wealth and civilization." M. Sismondi regards " as 
the object of political economy the physical welfare 
of man, so far as it can be the work of government." 
And M. Say defines it as "the economy of society; 
a science combining the results of our observations 
on the nature and functions of the different parts of 
the social body." Mr. Carey defines it " the science 
of the laws which govern man in his efforts to secure 
for himself the highest individuality and the greatest 
power of association with his fellow-men." And 
lastly, Mr. Macleod off'ers the definition, — "the sci- 
ence which treats of the laws which govern the rela- 
tions of exchangeable quantities." 



62 ELEMENTS OF POLITICAL ECONOMY. 

It will be noticed that in several of the preceding 
definitions the term wealth is introduced as a part 
of the definition. This word wealth has been the 
bane of Political Economy. It is the bog whence 
most of the mists have arisen which have beclouded 
the whole subject. From its indefiniteness, and the 
variety of associations it carries along with it in 
different minds, it is totally unfit for any scientific 
purpose whatever. It is itself almost impossible to 
be defined, and consequently can serve no useful 
purpose in a definition of anything else. It has been 
much debated, for example, among political econo- 
mists, whether the term wealth includes anything 
more than material products, such as houses, lands, 
metals, tools, food ; or whether the skill of artisans 
and the services of professional men are also to be 
reckoned as wealth. Some include under the term 
only material products ; others, as Mr. Mill, widen 
the signification so as to take in those immaterial 
services which result in an increase of material prod- 
ucts; while others still, with evident violence to the 
current meaning of the word, include under it all 
things, whether material or immaterial, for which 
something may be obtained in exchange. Thus the 
meaning of the word wealth has never yet been set- 
tled ; and if Political Economy must wait until that 
work be done as a preliminary, the science will never 
be satisfactorily constructed. It is simply impossible, 
on such an indefinite word as this at the foundation, 
to build up a complete science of Political Economy. 
Moreover the word wealth includes the two distinct 
ideas of value and utility, — ideas which must be 
kept perfectly distinct, or else there is no sound think- 



FIELD OF THE SCIENCE. 53 

ing and no sound conclusions within this field. Men 
may think, and talk, and write, and dispute to weari- 
ness, but until they come to use words with definite- 
ness, and mean the same thing by the same word, 
they reach comparatively few results, and make but 
little progress. And it is just at this point that we 
find the first grand reason of the slow advance hith- 
erto made by this science. It undertook to use a 
word for scientific purposes which no amount of 
manipulation and explanation could make suitable 
for that service. Happily there is no need to use this 
word. In emancipating itself from the word wealth 
as a technical term, Political Economy has dropped 
a clog, and its movements are now relatively free. 

Of the other definitions quoted, against which the 
objection just considered does not lie, some embrace 
too little, and others embrace too much. The only 
one which seems to the present writer to be exactly 
right, is the definition given by Archbishop Whately, 
namely, the science of exchanges. This definition, 
or its precise equivalent, the science of value, gives a 
perfectly definite field to Political Economy. Wher- 
ever value goes this science goes, and where value 
stops this science stops. Political Economy is the 
science of value, and of nothing else. To determine 
with distinctness what value is, to separate it from 
some things which have often been confounded with 
it, and thus to lay a foundation for the science at 
once satisfactory and complete, will be the work of 
the next chapter. But it is in order at this point to 
call attention to the second grand reason of the slow 
advance hitherto made in this field of inquiry. Value 
is a relative word. It is usually defined as purchas- 



54 ELEMENTS OF POLITICAL ECONOMY. 

ing-power, that is to say, the value of anything is 
its power of purchasing other things. It is not an 
independent quahty of one thing, as hardness is a 
quality of a stone, but it is a quality of one thing 
as estimated in a corresponding quality of something 
else. It is not a quality, in and of itself, of gold, but 
a relation which gold holds to other things which 
gold will buy. The notion of value is not conceiva- 
ble except by a comparison of two things, and what 
is more, of two things mutually exchanged. Politi- 
cal Economy therefore is based upon a relative idea, 
and has to do from beginning to end with a relation. 
Now in this there is an inherent difficulty, and a 
difficulty too which can never be obviated. It lies 
in the very nature of the subject. Men much more 
readily apprehend an absolute idea than a relative 
one. They more easily follow a discussion touching 
the independent attributes of single objects, such as 
length, breadth, thickness, and many others, than a 
discussion touching value, which is not an attribute 
of any one thing, but a relation subsisting between 
two things. I am not aware that this difficulty has 
ever been remarked on by any writer, but I am at 
the same time very sure that it constitutes the prin- 
cipal difficulty in this class of inquiries, and has been 
the main reason of the tardy progress hitherto made 
in them. 

In thus circumscribing the field of Political Econ- 
omy, I am not disposed to deny the possibility of a 
more comprehensive science than this is as thus 
defined, or of even a number of sciences, as yet 
undeveloped and unnamed, whose inquiry might 
be, under what intellectual and physical conditions, 



FIELD OF THE SCIENCE. 55 

men, whether as individuals or as aggregated in so- 
ciety, might obtain the greatest amount of physical 
comforts, or the highest degree of individuality, or 
the widest control over the powers of nature. Sev- 
eral of the definitions cited above imply more general 
inquiries than are relevant in a proper science of ex- 
changes ; and a good deal of the discussion in almost 
all books that professedly treat of Political Economy 
is drawn from territory that lies outside the strict 
limits of that science. Whatever others have done, 
or may hereafter undertake to do, 1 propose solely to 
investigate the motives and the conditions that gov- 
ern men in their exchanges. Such investigations 
have a definite field of view; and if properly pur- 
sued, will lead to a statement of those laws that 
constitute the Science of Value. To these, then, we 
next proceed ; and first of all, to an analysis of Value 
itself. 



56 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER IIL 

ON VALUE. 

If I take up a new lead-pencil from my table, for 
the purpose of examining aU its qualities, I shall 
immediately perceive those which are visible and 
tangible. The pencil has length, a cylindrical form, 
a black color, is hard to the touch, is composed of 
wood and plumbago in certain relations to each 
other, and has the quality, when sharpened at the 
end, of making black marks upon white paper. 
These qualities, and such as these, may be learned 
by a study of the pencil itself. But can I learn, by 
a study of the pencil itself, the value of the pencil? 
Is value a quality ? By any examination of its me- 
chanical, or by any analysis of its chemical proper- 
ties, can I detect how much the pencil is worth ? 
No. The questioning of the senses, however minute, 
the test of the laboratory, however delicate, applied 
to the pencil alone can never determine how much 
it is worth. These methods will discover the quali- 
ties that belong to the pencil as such, but I must 
take another method altogether to determine its 
value. 

Will the origin of the word Value help in finding 
a method by which I may discover the value of the 
pencil ? The word is derived from the Latin verb 
VALERE., to pass foY^ to he worth. There is a hint of 



ON VALUE, 57 

a comparison in the original meaning of the term it- 
self. Will the current use of language assist me 
any further in finding out the way to learn the value 
of my pencil ? In current language, when the value 
of anything is asked, the answer always comes in 
the terms of something else. We ask, How much is 
it worth ? The answer is, so many cents or dollars. 
The cents or dollars are very different things from 
the things whose value we inquire after; and thus 
we see again more clearly that value implies a com- 
parison of two distinct things ; and, if so, of course 
it is useless to try to ascertain its value by a study 
of the pencil alone. But what kind of a comparison 
between two things is needful, in order to ascertain 
the value of either ?" There is no use in laying 
down a certain number of cents by the side of the 
pencil for the purpose of fixing its value, as we lay 
down a carpenter's square by the side of a stick to 
ascertain its length ; because the cents have no com- 
mon physical quality with the pencil, as the square 
and stick have in common the physical quality of 
length. A simple comparison determines the rela- 
tive length of the square and the stick, and it makes 
no difference in the result whose the square is or 
whose the stick is. A borrowed square is just as 
good to determine length as any other, since that 
circumstance does not affect the terms of the com- 
parison : also, one man is competent to make the 
comparison, and it is not needful that he -be the 
owner of either of the things compared. 

But is a man who does not own a thing compe- 
tent to fix its value ? And is a man who does own 
a thing competent to fix its value by himself alone? 



58 ELEMENTS OF POLITICAL ECONOMY. 

The true answer to these questions brings out two 
peculiarities of that comparison by which value must 
always be ascertained. Besides the two things com- 
pared, there must be always two persons comparing, 
and each of these two persons must be virtually the 
owner of one of the things compared. Because I 
think my pencil is worth fifteen cents, is it there- 
fore worth fifteen cents ? Somebody else must think 
so too before that fact can be announced. Also, the 
comparison that two thieves make between two 
pieces of stolen goods would not go far in public 
estimation towards fixing the value of either piece 
of goods. Somebody, then, who owns the cents, 
must make a comparison with somebody else who 
owns the pencil, or the value of the latter is not likely 
to be truly ascertained. 

But besides such a comparison, essential as this 
is as towards the end in view, another step is need- 
ful before I can announce the value of the pencil. 
Not simply a comparison but an action also is neces- 
sary. I think it is worth fifteen cents ; an owner of 
cents, with whom the comparison is made, thinks so 
too; is it therefore worth fifteen cents? That is 
more than I can tell yet. I say to him. Will you 
take it and give me fifteen cents for it? He replies, 
I think it is worth it, but I am not ready to give that 
sum for it this morning. The value of the pencil is 
not yet determined. In order to that there must be 
an actual exchange of the pencil for the cents. 
There must be two things, two persons, a compari- 
son, an actual exchange by which each person shall 
receive in fact or in ownership that previously held 
by the other, — each rendering something /or the sake 



ON VALUE. 59 

of the thing received, before the determinate value 
of anything is possible to be stated. There may be 
expected value, estimated value, but actual value 
there is none, until a real exchange has settled how 
much the value is. The value of anything is some- 
thing else already exchanged for it. Value is not 
simply a relation subsisting between two things, but 
an actual fact established in connection with those 
two things. Quid pro quo is the universal formula 
of value. The pencil is not worth fifteen cents, be- 
cause I have not yet succeeded in obtaining that 
sum in exchange for it. 

Not dealing in pencils, nor liking to chaffer, and 
finding it a little troublesome to discover what the 
value of the pencil is, I ask myself what its value 
was when I purchased it ? That is an easy question. 
Two days ago I paid for it the sum of ten cents, 
United States currency. It. was the storekeeper and 
I. I owned the cents and he owned the pencil. We 
compared these two pieces of property together, and 
agreed to change ownership in them. I gave him 
the cents for the sake of the pencil, and he gave me 
the pencil for the sake of the cents. How much is 
my pencil worth ? I do not know. How much was 
it worth two days ago ? Ten cents exactly. 

If this preliminary view be just, it is clear that 
value is not in any true sense a quality residing in 
any one thing, but is a relation of mutual purchase 
established between two things. Nevertheless, it is 
often convenient to regard value as a quality inher- 
ing in a commodity or service. The convenience of 
such expressions as, " the pencil has value," " gold 
has value," is so great, that science will not consent 



60 ELEMENTS OF POLITICAL ECONOMY. 

to forego the advantage of using them, even though 
they are not scientifically accurate. Science justly 
prefers to make her language intelligible and popular, 
even at the hazard of perpetuating a misapprehen- 
sion. On such subjects as these, she is compelled in 
part to use language as she finds it; but she is cul- 
pable if she does not fix at the outset with absolute 
distinctness the meaning of her terms, however pop- 
ularly current, and then use the terms, always in the 
same sense, never confounding a term with other 
terms of a similar but not identical significance. In 
allowing, therefore, such expressions as, " gold has 
value," I do not use the term in any other than its 
defined sense, I do not imply that value is a simple 
quality, but I employ shortened forms of expression 
long consecrated by usage, and avoid circumlocu- 
tions sure to become tedious. So also, by using 
language that may imply that value exists before it 
is realized in an actual exchange, I do not admit 
that value exists independently of an exchange ; men 
employ foresight, put forth exertion, practice absti- 
nence, in reference to a future realization of value : 
it is proper, at any rate it is necessary, to speak of 
them as already employed upon value, and of value 
itself as a purchasing-jooi^;er residing in this or that. 
A concession to the exigencies of language is not a 
departure from the exactness of science. It is not, 
accordingly, true, speaking strictly, that value is a 
quality of gold in the sense in which weight is a 
quality of gold, because circumstances are easily con- 
ceivable, and have often occurred, under which gold 
would have no value at all. To the crew of a boat 
abandoned at sea, among whom the last biscuit had 



ON VALUE. 61 

been rationed out, a bag of gold belonging to one of 
the men would not purchase a biscuit belonging to 
another. The inherent qualities of the gold are 
present. It is still hard, and yellow, and heavy. 
But valuable it is not. It will not purchase any- 
thing. Value, therefore, is not an inherent and 
invariable attribute, but is the relative power which 
one thing has of purchasing other things. This 
power in any one thing will vary according to time 
and place and circumstances. It may cease alto- 
gether, as in the case just supposed, or it may rise 
under other circumstances to a very high degree ; 
but whenever it exists, it exists with reference to 
some other thing, which either is, or is supposed to 
be, exchanged with it. Ten cents had the power of 
purchasing my pencil, and my pencil had the power 
of purchasing ten cents. In this transaction the idea 
of value is developed. A similar transaction first 
introduced that idea into the world, and the endless 
succession and variety of such transactions have kept 
the idea in the world, and will keep it here till the 
end of time. Value, then, speaking strictly, is not 
an independent quality of the pencil, any more than 
it is an independent quality of the cents. Both are 
necessary in order that the value of either may be 
conceived of. The value of the cents is estimated, 
is nieasured by the pencil ; and the value of the 
pencil is estimated, is measured by the cents. In 
one word, value is always relative, and never abso- 
lute. To say that anything has an absolute value 
is a simple contradiction in terms. 

But why was I desirous to part with good United 
States money for the sake of the pencil, and the 



62 ELEMENTS OF POLITICAL ECONOMY. 

storek(;eper to part with a good pencil for the 
sake of the money ? The answer to this question 
will ground the science of value on the unchanging 
principles of human nature. I experienced a want 
which the pencil was adapted to satisfy. He expe- 
rienced a want which the money was adapted to 
satisfy. But between my want and its satisfaction, 
both of which were personal to me, there lay an effort, 
to be made either by myself or by somebody else in 
my behalf. So, between his want and its satisfac- 
tion, both of which were personal to him, there lay 
an effort, to be made either by himself or by some- 
body else in his behalf. If I had chosen to do so, I 
might have made the direct effort necessary in order 
to supply myself with a pencil. I might have made 
the pencil for myself. It would indeed have been a 
long and tedious process, would have required a 
learning of two or three trades, a journey to some 
plumbago-bed, the working and preparation of the 
mineral, and various other subordinate processes ; 
still, in the course of half a life-time it might per- 
haps have been done, and I might by direct efforts 
have supplied myself with a pencil as good as that 
which I purchased. So, too, the storekeeper, unless 
the laws had prevented it, might have procured for 
himself by direct efforts the metal cents which I 
gave him in exchange for the pencil. He might 
have dug the ores for himself, refined, alloyed, and 
minted them. Had we chosen respectively to take 
this course, and each been able to satisfy his own 
particular desire by his own unassisted efforts, the 
processes in either case would have had no relation 
to Political Economy. There would be in each 



ON VALUE. 63 

case a want, an effort, a satisfaction, but there would 
be no exchange. As a matter of fact, however, we 
exchanged the efforts which lay between our respec- 
tive desires and their respective satisfactions. I de- 
sired a pencil, he relieved me of the effort necessary 
to make it, and I experienced the satisfaction. He 
desired the cents, I relieved him of the effort neces- 
sary to procure them, and he again experienced the 
satisfaction. We each experienced our own desires, 
and our own satisfactions, but we exchanged efforts. 
Precisely in this exchange of efforts arose the phe- 
nomenon of value. I parted with my cents, which 
had cost me an effort, in order to satisfy my desire 
for a pencil, because my effort, represented in the 
cents, was less than the effort it would cost me to 
create the pencil. The shopkeeper parted with the 
pencil, which had cost him an effort, in order to sat- 
isfy his desire for the cents, because his effort, repre- 
sented in the pencil, was less than the effort which 
it would otherwise cost him to procure the cents. 
We exchanged efforts, therefore, for our mutual 
advantage. 

The principles of human nature, then, on which 
the laws of value are grounded, are these : Men 
have desires, are capable of making efforts to meet 
these desires, and experience a satisfaction when 
the desires are met. Th«^se three are indisputable 
and universal facts. But while the desire and the 
satisfaction are strictly personal to one man, that is 
to say, belong to him and cannot be communicated 
to another, it is not so with efforts. Efforts are ex- 
changeable. You have a desire, I make the effort 
to meet it, and you again experience the satisfaction. 



64 ELEMENTS OF POLITICAL ECONOMY. 

On the other hand, I have a desire, you make the 
effort to meet it, and I again have the satisfaction. 
We exchange efforts, but experience our own satis- 
factions. Desires, efforts, satisfactions, constitute 
the one circle of Political Economy, and value arises 
in every case from a comparison of two correspond- 
ing efforts. Efforts are naturally irksome. Every- 
body wishes to realize as large a satisfaction as 
possible from a given effort. If, by making that 
effort for another, a larger satisfaction will be real- 
ized than by expending it directly for one's self, there 
is an immediate and pressing motive to make the 
effort for another, and to reach the satisfaction, not 
directly, but indirectly, that is, by exchange. A pre- 
cisely similar motive actuates that other person. If 
his given effort will realize more for himself by be- 
ing put forth for the first man, and by accepting the 
first man's effort in return, he too will be anxious to 
exchange efforts with the first. There is a mutual 
advantage in thus exchanging. A given effort real- 
izes better satisfactions for each of the parties, and 
the reason for exchanges is thus seen to spring from 
the most active and invariable principles of human 
nature. 

The exchange of the cents for the pencil, and the 
pencil for the cents, is a simple case of value, but it 
is not the simplest. In this case there is an ex- 
change of one commodity for another commodity, 
the idea of value is instantly developed, and we say 
that the pencil is worth ten cents, or, what is exactly 
equivalent, ten cents are worth the pencil. There 
are two things in every exchange, — that which is 
parted with and that which is received. Attention 



ON VALUE. 65 

should be constantly directed to both. Many errors 
in science, and numberless mistakes in legislation, 
have arisen from not attending to this circumstance, 
as if it were the glory of trade to sell rather than to 
buy, whereas it is not possible to sell without buy- 
ing, because the pay must be taken for what is sold. 
In every exchange, therefore, of commodity for com- 
modity, the value of each is expressed in the other, 
and the relation between the two purchasing-powers 
is adjusted. This is the common case. The trade 
of all past ages, and the present commerce of five 
continents, presents us, in principle, with nothing 
different from this. The commerce of the world is 
substantially barter, that is, the exchange of com- 
modities for commodities ; and, though many pur- 
chases and sales may intervene, and money may 
play its part in facilitating the exchange, and many 
forms of credit may come in, before the transaction 
is finally closed, these do not alter in the slightest 
particular either the notion of value or its laws. 
Each repeated purchase and sale presents us over 
and over again with the same phenomenon, namely, 
the equalization through exchange of two purchas- 
ing-powers. This is value, and is the sole subject of 
our science. 

The simplest case of value, however, will throw 
light upon the more complex ones, and will be found 
to include them. Two farmers, who are neighbors, 
find, on talking over their respective crops, that one 
has more hoeing and less haying this year than 
usual, and the other less hoeing and more haying. 
A says to B, " Come over and help me hoe in 
June, and I will go over and help you hay in July." 

6 



66 ELEMENTS OF POLITICAL ECONOMY. 

B agrees. It is a mutual advantage. And so, to 
use the old expression, which is better here than 
any scientific terms could be, they change works. B 
does a service for A, and A does a service for B. 
The two services balance each other. They are 
mutually exchanged one for the other; and in the 
very proposal thus to exchange them the notion of 
value is conceived, and in the exchange itself value 
is both produced and measured. B's help in hoeing 
is worth A's help in haying. 

This exchange of one service for another service 
presents the simplest case of value ; and I now pro- 
ceed to show that it essentially includes all other 
cases. If it can be shown that value is always and 
everywhere the same thing, that it is always and 
everywhere the relation of mutual purchase es- 
tablished BETWEEN TWO SERVICES BY THEIR EX- 
CHANGE, Political Economy will be seen to possess 
one grand characteristic of the great sciences, namely, 
simplicity. This can be shown. There are only six 
cases of value conceivable^ because there are only 
three kinds of things that are ever economically ex- 
changed. These latter are, 1st. Material Commodi- 
ties, like the pencil ; 2d. Immaterial Services, like 
those of the teacher ; 8d. Forms of Incorporeal Prop- 
erty, like a United States bond. We may have 
then, first, an exchange of commodity for commod* 
ity, as the pencil for the cents ; second, of commod- 
ity for service, as five dollars for the advice of a 
lawyer; third, of commodity for some form of incor- 
poreal property, as a Waltham watch for a copyright; 
fourth, of service for service, as in the case of the 
two farmers just mentioned; fifth, of service for an 



ON VALUE. 67 

incorporeal, as a year's work for a five hundred dol- 
lar bond; and sixth, an incorporeal for an incor- 
poreal, as a bond for so many railroad shares.^ 
What is mutually transferred in all these cases is the 
ownership or property in something. Material prod- 
ucts may or may not be passed over to the pur- 
chaser at the time of the sale, but the ownership goes 
over to him in all cases. Personal services, unlike 
material products, are not commonly resalable by 
the purchaser; sometimes they are, as when one 
hires out for a time his own hired man. Most spe- 
cies of incorporeal property are transferable at will, 
as bank checks, patent-rights, and promissory notes. 
But this transfer of ownership, a feature in all cases 
of value, though less obviously so when simple ser- 
vices are rendered, does not present the best aspect 
for the complete understanding of value. That 
aspect is presented through the term services. 

It is mutual services, as well as mutual ownership, 
that are exchanged in these six cases ; and the word 
services carries us deeper into the central phenomena 
of value. Thus the client, with five dollars in his 
pocket, is just as much in position to do the lawyer 
a service, as the lawyer is in position to do him a 
service. The counsel is serviceable to the client, and 
the dollars are serviceable to the lawyer, and so they 
exchange. And just so when commodities are ex- 
changed with each other. The hatter serves you 
with a hat, and the shoemaker with a pair of boots, 
and you serve them with six dollars each ; or if the 
hatter be in want of boots, and the shoemaker of a 
hat, they serve each other with their respective prod- 

1 Compare Macleod's Banking, page 9. 



68 ELEMENTS OF POLITICAL ECONOMY. 

ucts. In every case of value, therefore, without 
exception, what is really exchanged, whether a com- 
modity intervene or not, are mutual services; and 
value is then produced, and only then, when two per- 
sons are in position to render each other a service ; 
and the respective services being rendered, that is 
exchanged, and the balance being struck, we have 
the value of one expressed in the other. 

Do I, then, obliterate the old distinction between 
services and commodities? Yes, I do, as far as 
the laws of value are concerned. I use the term 
" service " in a broad sense, which includes the spe- 
cific sense and something more. I mean by it, the 
rendering of anything for which something is de- 
manded in return. People sometimes do for others 
what are called services, out of sympathy, from be- 
nevolence, from duty ; but the characteristic of these 
is that they are free ; nothing is demanded in return. 
These, therefore, fall in the sphere of morals, and 
are outside the pale of Political Economy. There 
is no such thing as exchange proper within the field 
of morals, and there is nothing else but exchange 
proper within the field of economy. This principle 
alone marks the boundary-line between the sciences 
referred to. A service, then, in the language of this 
science, and as the word will henceforward be used 
in these pages, is anything rendered to another in 
view of a return, and for the sake of a return. The 
man who furnishes you a barrel of apples, does you, 
in this sense, a service equally with the physician 
who attends upon your fever ; and you pay thera 
both on precisely the same principles. You render 
to each an equivalent servics in return. To pay 



ON VALUE. 69 

them money is to render them a service, just as to 
furnish you apples and medical advice were a ser- 
vice to you. Whether a commodity, as apples, 
intervene or not, is, as far as value is concerned, a 
matter of indifference. The more specific use of the 
term "service," as opposed to a commodity, is in- 
deed convenient, and will, doubtless, continue to be 
used : the broader sense is exceedingly useful, and-^ 
by its aid, we clear up the whole subject of value. 

This ultimate definition of value, namely, that it 
is the relation of mutual purchase established be- 
tween two services, is substantially, but not in form, 
the definition of M. Bastiat. Mr. Macleod's defini- 
tion is also excellent, though I cannot give it the pref- 
erence : — " The value of any economic quantity is any 
other economic quantity for which it can be exchang-ed." 
If the question relate to the value of any specific 
thing whatever, Mr. Macleod's answer is perfect ; if 
the question be. What is Value ? the other answer 
seems to me to be equally satisfactory. The reasons 
why we may feel complete confidence in it will ap- 
pear in a more and more striking light as we proceed, 
and until we conclude. 

In the first place, this definition covers naturally 
and easily all those anomalous cases of value which 
have been so hard to reduce under any other general 
view. Take for instance the case of the value of the 
diamond. The English school, and especially Mr. 
McCulloch, claim that labor is the source of value, 
and that the purchasing-power of everything is pro- 
portioned to the labor which it has cost. Not at all 
is this the law of value. Mere effort, mere work, in 
itself considered, has no tendency whatever to create 



70 ELEMENTS OF POLITICAL ECONOMY. 

value. Much effort, much work, as by a dull but 
laborious writer of a book, may issue in very little 
value. Little effort, little work, as by a skillful 
pleader in the courts, may issue in very great value. 
Labor is not so much a cause of the value expected 
to accrue as it is a result of the value expected to 
accrue. Whately puts this just right when he says : 
" In this, as in so many other points in Political 
Economy, men are prone to confound cause and 
effect. It is not that pearls fetch a high price be- 
cause men have dived for them ; but, on the con- 
trary, men dive for them because they fetch a high 
price." In other words, value always has its start- 
ing-place in Desires ; and, although effort of some 
sort and in some degree is always associated with 
desire in the realization of value, the effort alone is 
not the cause of the value, nor can the value be 
said to be proportioned to the effort. For example, 
as I am strolling along the sea-shore, I accidentally 
perceive a splendid diamond among the pebbles. 
It is but a moment's labor to appropriate the prize, 
but do I on that account sell my diamond for one 
dollar less to the jeweller or the prince ? No. I 
am now in position to do a great service to any- 
body wanting a diamond. I demand a large service 
in return, and get it. I say to the man who wants 
it, give me ten thousand dollars for my prize, and 
you shall have it. It would be poor mercantile logic 
for him to reply : Your labor is not worth more than 
one cent a minute, and it did not cost you but one 
minute's labor to get that gem, and certainly one 
cent, therefore, is a fair price for the diamond. He 
rather reasons in this way : Can I by going myself 



ON VALUE. 71 

to the diamond-bearing regions, or in any diamond 
market elsewhere, procure for myself so good a gem 
as this by a less sacrifice than ten thousand dollars. 
He resolves this question mentally ; and, if nega- 
tively, I am sure of getting my price. In that case 
I am offering him a service worth at least ten thou- 
sand dollars. No one else is in position to render 
him the same service at so favorable a rate. If, on 
the other hand, there be other diamond dealers offer- 
ing gems as good as mine for less than ten thousand 
dollars, then I have pitched my demand too high ; 
my service is not worth that sum, because there is 
some other person ready to render the same service 
for a less sum. The value of my diamond, there» 
fore; is proportioned, not to the labor which it has 
cost me, but to the service which I am able to ren- 
der to the purchaser with it, compared with the ser- 
vice which he is able to render to me. I take advan- 
tage of his desire for the diamond, and crowd up the 
price as near as I can to the point at which he will 
either forego the possession of a diamond altogether, 
or can obtain a similar one from some other party. 
He takes advantage of my desire for the money, 
and crowds down the price as near as he can to the 
point at which I can either find another purchaser, 
or should prefer to retain the diamond myself. The 
comparison and adjustment of these two, my ser- 
vice to him and his service to me, fixes, for that sale, 
the value of the diamond. 

And here we must stop to notice what an exceed- 
ingly good word the English language provides us 
with, in this term service. It explains perfectly all 
anomalous, as well as all common cases of value. 



72 ELEMENTS OF POLITICAL ECONOMY. 

It combines in its own proper meaning all the ele- 
ments which make up and which vary value. First, 
it implies always two persons, the person rendering 
and the person receiving the service. Next, it always 
implies some effort on the part of the person render- 
ing, and some satisfaction on the part of the person 
receiving the service. Thus when one service is 
spoken of there are always implied two persons and 
two things, and the two things are the effort of one 
person and the satisfaction of another. But when 
two services are spoken of as exchanged, as is always 
the case in Political Economy, there are implied, as 
before, two persons, each of whom makes an effort 
for the other, each of whom is recipient of a satis- 
faction which comes from the effort of the other, 
and each of whom estimates in the light of his own 
satisfaction that which is received as compared with 
that which is rendered. It is this reciprocal estima- 
tion alone that constitutes value ; and it is the excel- 
lence, I may almost say the glory of the term ser- 
vice, that it gathers up in its own signification all 
the elements w^hich go to determine value, and which 
ever vary its amount. As here is the very kernel 
and core of our science, illustration will be well 
bestowed at this point. Let the parties be A and 
B, in position to render each other a mutual service. 
A has a desire which B's effort can meet, and B has 
a desire which A's effort can meet. Up to the point 
when the exchange takes place there are only four 
elements that play any part in the transaction as 
preparatory to it, namely, two desires and two efforts. 
In the act of exchange itself two other elements 
come into being, namely, two relative estimates, A's 



ON VALUE. 73 

estimate of B's effort for him as compared with his 
own effort for B, and B's estimate of A's effort for 
him as compared with his own effort for A. As a 
result of the exchange, and as that for the sake of 
which the whole series took place, there appear two 
other elements, namely, two satisfactions. Here is 
the whole of it. Now, then, any change in any one 
of the first four elements will vary value ; and there 
is nothing else in the world that can vary it. If A's 
desire for that which B is ready to render be less- 
ened, the other elements remaining the same, A's 
estimate of B's effort as compared with his own is 
lessened, and value is at once affected. If A's desire 
be increased, other things being equal, his estimate 
of B's service as compared with his own is increased, 
and value is affected. Just so any diminution or en- 
hancement of B's desire for that which A is ready 
to render, acts at once upon B's estimate of A's 
effort as compared with his own, and consequently 
acts at once upon value. Again, any change in 
either effort as compared with the other, such as its 
becoming more or less onerous than the other, will 
of course affect the estimate of the one as measured 
by the other, and of course also will vary value. 
These first four elements then are not only the ele- 
ments out of which value subsequently springs, but 
also are the elements any change in any one of 
whicn, the others remaining the same, will tend to 
vary value, and without a change in some one of 
which, relatively to the others, value never will be 
varied. The term services expresses just these ele- 
ments which play and vary as preparatory to the 
realization of value. Value itself is realized from 



74 ELEMENTS OF POLITICAL ECONOMY. 

the adjustment of the fifth and sixth elements, that 
is to say, from the equalization of A's estimate of 
B's service with E's estimate of A's service. This 
adjustment also, together with the remaining ele- 
ments, the two satisfactions, are all implied in the 
expression mutual services, or, if you please, two 
services exchanged. If any of my readers object to 
this paragraph as abstract, I have only to reply that 
it is no more abstract than the subject-matter; and 
if any of them find difficulty in the relative nature 
of the transaction unfolded, in the fact that the 
views and comparative estimates of two persons 
must be kept in mind throughout, I can only say, 
that this science starts with a relation and has to do 
with a relation every step of the way to the end. 
This is the one intrinsic, unavoidable difficulty that 
lies at the threshold of the science ; and whoever, 
by taking pains at the outset, familiarizes this diffi- 
culty to his thoughts, and thus overmasters it, will 
walk thenceforward with positive pleasure through 
the whole economic domain. And if there ever was 
a science grateful for a word, as lessening its inhe- 
rent difficulties and helping explain its phenomena, 
Political Economy, which has wandered these twice 
forty years in the wilderness of wealth, thankfully 
accepts in the term service its latest and most impor- 
tant gift. 

In the second place, the definition of value which 
is here given expands the field of Political Economy 
to its natural limits. Even Adam Smith, and the 
English economists generally, while defining wealth 
as consisting of material commodities only, have 
experienced a difficulty in excluding from the do- 



ON VALUE, 75 

main of the science certain mere services, and in 
denying that value resides in these services. Some 
have endeavored to avoid the difficulty in one way 
and some in another. Some have stigmatized those 
who render a mere service to society as unproduc- 
tive laborers, and have gifted with the title of pro- 
ductive laborers all those who bring forward some 
vendible commodity. John Stuart Mill, as we have 
seen, enlarged his definition of wealth so as to take 
in all those sorts of mere services whose action goes 
directly to sw^ell the volume of material commodi- 
ties. It is conceded then that value resides in some 
services ; why not then in all services which are put 
forth for the sake of a return ? Why allow value to 
a service which comes to be embodied in a commod- 
ity, and deny the term to another service just as 
necessary to our comfort that is not thus embodied? 
Why class the brick-maker as a productive laborer, 
and refuse the epithet to the hod-carrier, without 
whose help the bricks would never reach their ulti- 
mate destination ? The truth is there is no ground 
for this distinction ; and the very difficulty which 
the various writers have found in trying to make it, 
is a pretty sure proof that it ought not to be made 
at all. By making its definitions such that value 
can only be supposed to reside in tangible commod- 
ities, Political Economy excludes itself, without any 
good reason, from a large portion of its own field. 
Let us see if there be any good reason. For exam- 
ple, a man buys a spelling-book for his boy, for the 
sake of his learning to read. He then hires a teacher 
to teach him to read. According to the usual defi- 
nitions the spelling-book has value, while the service 



76 ELEMENTS OF POLITICAL ECONOMY. 

of the teacher has none. But why has it none ? It 
has to be paid for, certainly, as much as the spelling- 
book has to be paid for. There are two separate 
exchanges; first, of money for the spelling-book, and 
second, of money for the service. Both are made 
with the same object in view, namely, that the boy 
may learn to read. The want of a spelling-book 
and the want of a teacher are the two external 
obstacles in the way of reaching that object; and 
the father overcomes them both by similar means, 
that is to say, by an exchange ; and there is no such 
difference in the two transactions as will justify or 
even tolerate the distinction sought to be made be- 
tween them. The teacher sells his service. The 
shopkeeper sells his book. The father renders a ser- 
vice to each equivalent to that received from each. 
Political Economy now claims jurisdiction over both 
transactions alike, and affirms value as truly of the 
service as of the commodity, and more truly of the 
service than of the commodity, inasmuch as it stands 
ready to prove that so far as value resides in any 
commodity it resides there simply in virtue of the 
human services v/hich have been concerned in its 
production and which will be subserved by its ex- 
change. What is ultimate, therefore, in all exchange, 
is services and not commodities ; and the services 
which are bought and sold in every department of 
life, the services, for example, of the lawyer, the phy- 
sician, the clergyman, the teacher, the editor, the 
musician, fall as much within the province of Polit- 
ical Economy as the traffic of commodities in the 
market-place. Our science asserts its claim of juris- 
diction wherever services are mutually exchanged. 



ON VALUE. 77 

A third advantage of the definition of value novir 
given, and one closely connected with the last, will 
be seen in the fact that it frees the discussion from 
a perplexing error which has long infected this class 
of inquiries, namely, that value is somehow or other 
connected with matter. This notion has controlled 
the definitions of wealth ; has led, as we have just 
geen, to groundless distinctions among services ; and 
has taken possession of language so thoroughly that 
no judicious writer will attempt at this late day to 
dislodge it from that strongest of the citadels of 
error. Rather than disturb the current nomencla- 
ture of business he will allow such expressions as 
these to stand : Gold has value, strawberries have 
value. But it is very easy to show that value does 
not reside in matter, or in any form of matter, but 
only in human services exchanged ; and that, there- 
fore, value is never of God's creation, but always of 
men's exertion. We shall see abundantly, before 
we finish the chapter, that utility is one thing and 
value quite another. No effort of men can add one 
particle to the existing matter of the globe, but it has 
been supposed that the efforts of men, by changing 
the form of existing matter, impart the quality of 
value to it, and that thenceforth the value remains 
fixed in the matter itself. The efforts of a woodman, 
for example, with the cooperation of nature, can trans- 
. form the stock of a tree into wooden bowls, and value 
is now supposed to reside in the vendible bowls, and 
the current language is, that each bowl has a value 
of fifty cents. Why has it a value of fifty cents ? 
Clearly enough, to reward his service who felled the 
tree, and sawed the block, and then hollowed out the 



78 ELEMENTS OF POLITICAL ECONOMT. 

bowl. But the service having been employed upon 
the matter, and being embodied in it, is not what is 
really sold now the matter, and not the service ? I 
answer, No. What is really sold is the service, and 
not the matter. And this, which at first sight might 
not be thought important, but which is really very im- 
portant, becomes apparent as soon as we reflect that 
any changes in the conditions of the service instantly 
affect the value. Our woodman has on hand a stock 
of one hundred bowls, which he offers for sale at 
dfty cents apiece, as fairly rewarding his personal 
services in their production. But, unknown to him, 
an enterprising neighbor has invented a machine 
which enables him to make bowls in every respect 
equal to the others, and to offer them at twenty-five 
cents apiece. Whoever now wants a wooden bowl 
can have that service rendered him for twenty-five 
cents return. The first man finds that he cannot 
sell a bowl for over twenty-five cents, and that his 
stock of one hundred has sunk at once in value from 
fifty dollars to twenty - five dollars. What is the 
matter with his bowls ? The matter is not in the 
matter. The matter is all there, and the form of 
the matter is all there, but the value is just one half 
escaped, because the service which he can render to 
a buyer by a bowl has been, by the enterprise of his 
neighbor, just one half lessened. Value then follows 
the fortunes of services, and varies as they vary, just, 
as much when they have been employed upon com- 
modities, as when they are independent of them, 
and we see that the value resides in services com- 
pared, and not in matter at all. 



ON VALUE. 79 

I now proceed to indicate the manner in which 
language came to be used in such a way as gives 
color to the notion that value resides in the com- 
modities rather than in the services. An instance 
will bring the whole subject before us clearly In 
many parts of the United States delicious wild 
strawberries may be had in their season for the 
simple picking. The pastures and meadows are 
open to every comer, and the strawberries are con- 
sidered to belong, not to the owners of the fields, 
but to any one who takes the labor of picking the 
fruit. Let us suppose that my family are fond of 
the berries, and that no member of it likes to un- 
dergo the labor of picking them, and that I hire 
some girl, who offers her services for the purpose, 
to go to the fields and gather some of the fruit for 
us. When she returns I pay her for her service. 
She does not conceive of any value residing in the 
strawberries themselves. Neither do I. She makes 
a series of efforts for the gratification of my family, 
and is paid for her efforts. Language recognizes 
the true state of the case, and she does not say now 
that she sells us the berries, and we do not speak of 
buying the berries of her. She thinks only of her 
service, we think only of her service, she is paid only 
for her service : language is exact in the premises. 
The next day, as the girl is about to go for us again, 
my neighbor says to her, " You bring me as many, 
and I will pay you as much." The third day, a 
second neighbor makes a similar bargain with her, 
and she brings strawberries for the three families, 
and is paid in each case for her service. The girl, 
on the fourth day, taking it for granted that we shall 



80 ELEMENTS OF POLITICAL ECONOMY. 

be likely to want strawberries that day also, doeB not 
wait to be sent, makes no bargain for her services 
beforehand, but goes and gathers the fruit. This 
time there is a change of language when she comes 
to my door. She now offers to sell me strawberries. 
" How much are they worth ? " I ask. She names 
probably the same sum which she had before re- 
ceived for the service of picking the same quantity. 
She could not materially increase it, because there 
are doubtless other girls who are ready to render the 
seivice which she before rendered, at the same rate. 
But attention is now drawn away from the service 
to the berries, and the idea of value is attached to 
the berries, and language adopts the illusion, and 
says, "the berries are worth so much." Who does 
not see, however, that the transaction is substantially 
the same as before ? Who does not see that it is 
only by a figure of speech, convenient indeed, but 
still only a figure, that the berries are now said to 
have value ? If there be no difference in the last 
case as compared with the former cases in the two 
desires and in the two efforts, it is plain to reason 
that there can be no difference in the value, and con- 
sequently no difference in that which is really sold. 
But my desire for the berries, my effort as represented 
in the price paid, her desire for the money, and her 
effort as represented in the picking, are all just as be- 
fore. She expected me to take them, and I took 
them as before. The value, therefore, the purchas- 
ing-power, resides not in the berries, but in the ser- 
vice ; that is to say, in that which she renders as 
compared with that she receives; and it is only a 
freak of language which leads us to suppose other- 



ON VALUE. 81 

wise. This is but a simple instance, but the princi- 
ples of the instance are applicable to all commodities 
whatsoever. It is only mediately and figuratively 
that commodities can be said to have value at all ; 
and if we use the common language, and say that 
they have value, we must always remember that 
they have it simply and solely in consequence of the 
human services which have been employed upon 
them, and which may be subserved- by them, as 
related to those other human services for wiiich they 
may be exchanged. If this be true, and it seems to 
me certain that it is true, it throws a flood of light 
upon the whole field of value. More attention must 
be given hereafter, in Political Economy, to persons, 
and less to things. Man and his wants, man and 
his efforts, become at once the chief topics, while 
the material products on which efforts are employed, 
and which minister to wants, sink in relative posi- 
tion. It follows also from this distinction, that there 
is not so much difference as is commonly supposed, 
when a man works for others, and when he sets up 
for himself, — between a journeyman and a master. 
The journeyman sells his services, and the master 
sells nothing more or other than his own services. 
The services of the master may not be manual, they 
may be merely supervisory, or they may be con- 
nected with the use of his capital; but the finished 
product, when it is ready for the consumer, repre- 
sents the aggregate of the human services which 
have been employed upon it, and whoever sells it, 
sells those services, and its ultimate value is deter- 
mined, as all other value is, by a double comparison, 
the purchaser's comparison of the service of the 



82 ELEMENTS OF POLITICAL ECONOMY. 

product to him with that which he renders, and the 
seller's comparison of the service he receives with 
that of the product. Service for service, in the last 
analysis, rather than commodity for commodity, is 
the rule of value and the law of exchange. 

It may be observed, in the fourth place, that a 
principal merit of the definition of value insisted on 
in this chapter, is the discrimination which it allows 
between utility and value. It is absolutely essential 
that these two ideas be not confounded. But they 
are confounded in all the earlier writers on wealth. 
The word wealth itself inextricably confounds them. 
Whole discussions in Adam Smith are marred by 
his not consistently attending 'to the distinction, 
which he himself draws in one place, between 
"value in use and value in exchange:" meaning 
by the former expression simple utility. Say mixes 
up the two ideas even more completely than Adam 
Smith does ; and the errors of the two writers in this 
respect gave rise to the twentieth chapter of JNIr. 
Ricardo's book,^ in which the difference between 
utility and value is pretty clearly unfolded. Mr. 
McCulloch, too, always insists upon this difference, 
and correctly maintains that the distinguishing char- 
acteristic of utility is, that it is gratuitous ; although 
the theory of value of each of these writers is too 
narrow, unduly restricting the field of Political Econ- 
omy by assuming that value rigidly inheres in com- 
modities only. The example of these writers shows 
that the distinction referred to can be made even un- 
der their definition of value, but it is not so easily and 
practically made as under the true definition, because 

I Principles cf Political Economy and Taxation. 



ON VALUE. 83 

in the true definition attention is inevitably drawn to 
two persons, instead of to one thing, and utility, which 
is simple capacity to gratify any desire^ is neatly dis- 
criminated, even in the nomenclature itself, from the 
mutual efforts by which the mutual desires are met. 
The word service enables us to draw the distinction, 
and to hold it fast. 

Utility, then, is the capacity which any thing or 
any service has to gratify any human desire whatso- 
ever. Political Economy has nothing to do with 
the estimation in which different desires are held by 
a philosopher or a moralist. It is enough to consti- 
tute for it utility, if anything will meet anybody's 
desire or serve anybody's purpose. In this sense, 
which is the etymological and only just sense of the 
word, ardent spirits have utility just as wheat has 
utility. The same thing may have no utility for 
one man, a low utility for another, and a very high 
utility for a third; since the first has no desire for it, 
the second a feeble, and the third a strong desire for 
it. Desires are personal to individuals. There is 
no common standard with which they may be com- 
pared. They are not exchangeable. Utility is the 
capacity which anything has of meeting any one of 
these desires at any time or in any place. But some 
things have this capacity in a high degree which 
are never exchanged, which are never bought or sold, 
and which consequently can have no value. The 
air we breathe, the light in which we recreate our- 
selves, the water we drink from the spring or brook, 
all have the highest utility, but no value. They 
connect themselves with no service. We give noth- 
ing for them. They, and such as they, are the 
direct gifts of God. They are gratuitous. 



84 ELEMENTS OF POLITICAL ECONOMY. 

But utility is always present in all value also, 
since it is an element in all service ; and the utility 
that appears in connection with value is always de- 
rived partly from Nature and partly from man. It is 
impossible to say, in any given case, how much is 
attributable to Nature and how much is attributa- 
ble to man. It might seem at first sight, as if, 
in the case of the diamond, or in the case of the 
strawberries, the utility were wholly the gift of Na- 
ture, but the diamond undiscovered among the 
pebbles, and the strawberries unpicked upon the 
meadows, can hardly be said to have utility, much 
less value. The human service that fits each of 
thes3 to meet a present desire is an essential contribu- 
tor to their utility. On the other hand it might seem 
as if the utility of a painting were wholly referable 
to the art of the painter ; but the tenacity of the can- 
vas, the flexibility of the brush, and the brilliancy of 
the colors, are the contribution of Nature. Although^ 
therefore, all utility that ever appears in connection 
with value is partly due to the efforts of men, it is 
none the less essential to clear thinking in this de- 
partment to separate distinctly in the mind the utility 
from the value. The utility of a service may be 
great and its value little ; the utility of a service may 
be great and its value also great. They are distinct 
things." They become, as it were, commingled in the 
service rendered, but the utility is one thing, and the 
value a distinct thing. Utility is ultimate : value is 
mediate. Utility is absolute with reference to the 
individual: value is always relative. The utility in- 
volved in every valuable service is derived from two 
sources, — the free contribution of Nature, and the 



ON VALUE. 85 

onerous contribution of man ; but the value of such 
services in general tends perpetually to beconae pro- 
portionate to the onerous human contribution, and 
not to the aggregate utility. If the service be unique, 
if only one person or a few be in a position to render 
it, no useful principle can be laid down, which shall 
discriminate the two components of the utility ; but 
in respect to the vast mass of services, of which a 
market rate can be predicated, it is very clear that the 
competition with each other of those who are ready 
to render them, will fix the current value at a point 
which shall just about compensate for the onerous 
elements involved. That portion of the utility which 
is the free gift of Nature will be very nearly a com- 
mon factor in that whole set of services. The action 
of competition will eliminate this common factor, 
and tend constantly to determine value on the basis 
merely of what man has done to impart utility to 
those services. Thus, if ten men bring ten horses to 
the market to exchange against money, though the 
utility of the horses be derived in large degree from 
the free gifts of Nature, yet there are some of the 
owners who will be willing to part with their prop- 
erty at a price that will compensate them for what 
they themselves have contributed towards that utility. 
The action of these will tend to fix the price of the 
whole ten. There is no tendency in value, then, to 
proportion itself to the aggregate utility of a service, 
but there is a tendency in value to proportion itself 
to the aggregate of the onerous human efforts repre- 
sented in a service. 

This principle, which I deem important, perfectly 
accounts for the low value of many services, which 



86 ELEMENTS OF POLITICAL ECONOMY. 

may be said nevertheless to have a high utility. The 
girl brings delicious strawberries to my door in sum- 
mer. Their utility is great, their cajsacity to gratify 
my j3a!ate and that of my family ivS exquisite, but 
her effort in picking and bringing them is relatively 
little, and therefore it is little that I pajr her. She 
cannot charge me one farthing for all that has been 
done for the fruit in the wonderful laboratorj'" of Na- 
ture. Should she attempt to do so, there are doubt- 
less other girls willing to bring me the fruit for a fair 
equivalent for their personal eiforts only. Utility 
and value, then, are different things; we must' cer- 
tainly believe this, when we see some things, as air, 
possessed of the very highest utility and no value at 
all ; and other things, as strawberries, possessed of a 
high utility and a low value. 

The history of economy is full to a surfeit of the 
theoretical errors and of the practical blunders whici 
have come from confounding value with utility ; and 
from not attending to the fact that all utility, until 
some human service has been mingled with it, is 
absolutely free. God is a Giver. He gives sunlight, 
and air, and water, in abundance. He gives the 
earth, with all its materials, and with all its powers, 
and with all its spontaneous fruits, gratuitously to 
man. At the very first, He gave to man, " dominion 
over the fish of the seas, and over the fowl of the 
air, and over every living thing that moveth on the 
earth." So far forth as these gifts minister directly 
to men's wants, there is utility indeed, but no value. 
I3ut since, for the most part, human services are 
required to mould these gratuitous materials, to har- 
ness these gratuitous powers, to make these gratui- 



ON VALUE. 87 

tous fruits and animals available for use, and since 
services for this purpose are exchanged among men, 
value springs up in connection with these utilities, 
but must not be confounded with them. The utili- 
ties, disengaged from the service, are free. God 
never takes pay for anything, and has not author- 
ized anybody to take pay in his behalf; what is paid 
for is the service of man, and not the bounty of 
Nature. Even the powers of Nature which men 
avail themselves of by machinery, such as water, 
wind, and steam, all work for nothing : water gravi- 
tates, and wind blows, and steam putl's, for nothing. 
These all, and such as these, help to create utilities, 
but ultimately no -value. Value is in the service 
which makes the machine, and in the service which 
tends it, but in the power which moves it, unless 
that power be human muscle, there is no value. 

Value must be carefully distinguished from Price. 
The price of anything is its purchasing-power ex- 
pressed in money ; the value of anything is its pur- 
chasing-power expressed in any other purchasing- 
power whatever. Price is a relative word, but spe- 
cific ; value is a relative word, but general. When 
we speak of the price of a service, we mean the 
sum of money which that service will buy; but 
when we speak of the value of a service, we mean 
the command in exchange of that service over other 
services generally. Thus, we say, " This coat is 
worth twenty-five dollars;" that is its price. The 
value of the same coat never could be completely 
expressed, because it would require a comparison not 
only with hats and gloves and boots and vests, but 
with all other things which are ever exposed for sale. 



88 ELEMENTS OF POLITICAL ECONOMY. 

Therefore, for convenience' sake, value is commonly 
reduced to price. By knowing the price of various 
things, we readily compare their value relatively to 
each other. Thus, when we know the price of the 
coat at 25 dollars, and of gloves at 2, of hats at 5, 
and vests at 10 dollars, we easily determine the 
value of the coat as estimated in gloves, hats, and 
vests, namely, that its value as compared with theirs, 
is respectively 12|, 5, and 2^ tim.es theirs. The value 
of anything may remain nearly uniform while its 
price may greatly vary. At the present writing 
(1873), the prices of almost all commodities are 
much above the normal rate, because the currency 
of the country is much depreciated as compared 
with gold ; but the value of these commodities, that 
is to say, their power of purchasing each other, is 
just about as it was before the depreciation be- 
gan. All other commodities have risen in relation 
to the one commodity, money ; or, which is the same 
thing, money has fallen in purchasing-power in rela- 
tion to all other commodities ; and there is in conse- 
quence a universal rise of prices ; but it would be a 
total mistake to suppose that values have risen. A 
bushel of corn, now selling at one dollar, will buy no 
more labor, or hay, or cloth, than it used to buy when 
it sold for less than one dollar a bushel ; because the 
labor,' hay, and cloth have risen in relation to money 
in the same proportion as the corn has ; while in re- 
lation to each other no changes have supervened. 
Services and commodities, with few exceptions, ex- 
change with one another at the old rates, — value 
is unaltered ; but exchange for money at much 
above the old rates, — prices have risen. More- 



02f VALUE. 89 

over it is not possible that there should be any gen- 
eral rise or fall of values, as there may be a general 
rise or fall of prices. A rise in the value of anything 
implies a fall in the value of those things with which 
you compare it j that is to say, if it will buy more 
of them, they will buy less of it. Its rise in value im- 
plies their fall in value, and conversely. Every rise 
in value of any service involves a corresponding fall 
in other services ; and every fall in value of any 
service involves a rise in value of other services; 
and therefore, a general rise or fall of values is im- 
possible. Nothing is more common than a rise or 
fall of value in particular services. Suppose, for 
instance, an improvement in machinery by which 
broadcloth can be made with one half the former 
effort, and that no change has been made in the 
efforts requisite to make the gloves, hats, and vests 
of our former example, and no change in the views 
of those who wish to exchange them. The coat 
will sink at once to about half its former value, not 
only in relation to gloves, hats, and vests, but in re- 
lation to everything which does not happen to be 
aflected by a similar depressing cause. It is cor- 
rect to say that the value of the coat has fallen. As 
estimated in gloves, hats, and vests, its value now is 
only 6], 2^, and 1^ times theirs, respectively. But 
while coats have fallen in relation to the other com- 
modities, the other commodities have risen in rela- 
tion to coats ; and if similar improvements should 
be made in the machinery by which gloves, hats, 
and vests are made, so that one half less effort will 
bring these also to market, views of parties as before 
remaining unchanged, they will exchange now for 



90 ELEMENTS OF POLITICAL ECONOMY. 

coats exactly in the same ratios as at first, namely, 
12h, 5, and 2i, respectively, for 1. As soon as the 
improvements affect all the commodities equally, 
value stands just as it did before the first improve- 
ment was made. Viev^rs of the parties remaining 
the same, it is only an advantage or disadvantage 
affecting some services and not others, that will 
vary their value in exchange : whatever affects them 
all equally will have no effect upon value. Thus, a 
universal rise of wages in any country, provided they 
rise in all departments of effort equally, will have 
not the least effect upon value ; and we have just 
seen that a universal rise of prices at present ex- 
perienced in this country, has no effect whatever 
upon the general purchasing-power of services in 
exchange, but is only a token that the one com- 
modity, money, has fallen relatively to them. 

I proceed in this elementary discussion of value 
to inquire whether there is, or can be, any meas- 
ure of value — any standard, by a comparison with 
which we may determine the general purchasing- 
power of different services. It has commonly been 
supposed that there is such a measure, and po- 
litical economists have expended a great deal of 
strength in endeavoring to discover what it is. The 
results have hardly been commensurate with the 
zeal and patience of the search. Adam Smith 
seems at one time to regard labor as the best meas- 
ure of value, that is, the quantity of labor which any 
commodity will buy as the best gauge of its power 
to buy commodities in general. At another time he 
seems to think that corn is abetter measure of general 
exchange value than labor. Others have thought 



ON VALUE. 91 

that price furnished the best attainable standard of 
comparison ; in other words, that the quantity of 
gold or silver which anything will purchase, will best 
enable us to determine the quantity of all other 
things which it will purchase. Others still have 
supposed that the cost of production of any com- 
modity would give the most accurate rule by which to 
decide the value of the commodity, that is, the degree 
of its command over purchasable articles generally. 
But the truth is, a measure of value in the sense in 
which it has been sought after by these writers, is 
something impossible to be realized. It never would 
have been sought after, unless value had been sup- 
posed to be a rigid quality inhering in commodities, 
and, when once placed in them by whatever process, 
to be invariable. We have seen, however, that value 
is not a quality inhering in any one thing, but is 
a relation subsisting between two services which 
two persons are in a position to render to each other; 
and that this is not an inflexible relation, but is vari- 
able by any change in the views of the two persons^ 
by which either of them puts a different estimate 
upon the service about to be rendered as compared 
with the service about to be received. We have 
seen sufficiently already, that there are four things, 
and only four, any change in any one of which will 
vary value ; and that these four things are two de- 
sires and two efforts, the two desires belonging to 
two persons, and the efforts made by two persons 
each for the other. Now these four elements are in 
their very nature so liable to vary, and as a matter 
of fact do so constantly vary, that no man who 
clearly perceives what value is, will waste time and 



92 ELEMENTS OF POLITICAL ECONOMY. 

ingenuity in searching for an invariable standard of 
that which in its nature is variable and relative. 

But while no reliable measure of value is possible 
to be found, there are cer-tain limitations and princi- 
ples of much importance which ought to be given 
in this connection. Although labor alone, as we 
have seen, cannot be regarded as the cause of value, 
for, if it were asserted to be such, the inquiry would 
be pertinent, what is the cause of the value of labor; 
yet, value always stands in connection with human 
efforts, and, the mutual desires being presupposed, 
there are always limitations of value lying partly in 
the effort made by the person serving and partly in 
the effort saved to the person served. In every ex- 
change, each of the parties is reciprocally serving 
and served, and it is clear that they would not 
exchansre unless the service which each renders to 
the other is less onerous than the effort which each 
would have to make if each served himself di- 
rectly. It costs a certain effort for me to bring water 
from the spring ; I am willing to pay a neighbor for 
bringing it for me, but I should not be willing to 
make a greater effort for him in return than the ef- 
fort is to bring it myself; neither should I be willing 
to make an effort for him which I regarded just as 
onerous as the bringing the water: unless there is 
some "service which he will accept less onerous to 
me than that, I shall continue to bring the water for 
myself. On the other hand, he will not render the 
service to me of bringing the water, unless it be less 
onerous to him than the doing that for himself which 
1 am ready to do for him. This principle, applica- 
ble to all exchanges whatsoever, draws on the one 



OK VALUE. 93 

side the outermost line, beyond which value never 
can pass. It may be asserted with confidence that 
no man will ever knowingly make a greater effort to 
satisfy a desire through exchange, than the effort 
needful to satisfy it without an exchange. More- 
over, within this outermost limitation which is made 
by the comparative onerousness of the respective ef- 
forts, there is a second limitation of a similar kind. 
To pursue the same illustration, while I should 
never make an effort for another in return for his 
bringing the water, greater than that required to 
bring it myself, the return effort may be very much 
less than that effort, and may sink down to a point, 
below which I can get no one to bring the water 
for me. Suppose I estimate the effort required to 
bring the water myself as 10 ; and that there are 
several persons who would be glad to do that service 
for me for a return service which I estimate as 8 ; 
and that there are two persons who are willing to 
do it for something which I estimate as 6 ; and that 
there is only one person who will do it for a return 
service which I regard as 5. It is evident that the 
extreme limits of the value of that service to me are 
10 and 5. Higher than 10 it cannot go, lower than 
5 it cannot sink. I should render the service esti- 
mated as 8, rather than forego having the water 
brought for me ; but I shall render the service esti- 
mated as 5, just as long as there is any one person 
who will make the exchange with me on those terms. 
If he declines the exchange, I fall back on one of 
the two persons in the class above him, and value 
rises now from 5 to 6. It will be steadier at 6 than 
it was at 5, bees use there are two persons ready to 



94 ELEMENTS OF POLITICAL ECONOMY. 

render the service at that rate. If each, however, in 
turn should give out, I should then be obliged to fall 
back upon the larger class ready to serve nie for a 
return service of 8. At this point the value would 
be very steady from the presence of numerous com- 
petitors anxious to serve me at that rate, and it 
could by no possibility rise above 10. Between 10 
and 5 the value may fluctuate, but it cannot over- 
pass these limits in either direction. Therefore we 
may say that the maximum value of any service in 
exchange is struck at the point where the recipient 
will prefer to serve himself, rather than make the ex- 
change ; and the minimum value of any service in 
exchange is struck at the point below which the re- 
cipient cannot get himself served. These two limits, 
it will be observed, are found in the two elements 
which we have called efforts. 

But there are also limitations of value in the two 
elements which we have called desires. In the fore- 
going illustration, it is supposed that my desire for 
the water is all the while of uniform strength, and 
the desire of each of the three classes willing to serve 
me for the return service is uniform also, though 
each class makes a different estimate of the compar- 
ative efforts. Let us now suppose that the efforts 
on either side remain invariable, but there is a 
change in the element of desire. Any capacity in 
anything to gratify any desire of anybody is utility. 
For simplicity's sake, let us look only to the one 
man who was ready to bring the water for a return 
service which I estimated as 5, and suppose that he 
is the only man who will do me the service on any 
terms. Let now the utility of the water to me be 



ON VALUE. 95 

increased, and let him know that fact, all other ele- 
ments remaining as before, and he can crowd up 
the value of his service towards 10, according to the 
intensity of my desire. Of course he cannot crowd 
it over 10, but the limit below that will now be de- 
termined by the relative strength of my desire. On 
the other hand, if my desire be as before, and the 
two efforts as before, and his desire for ray return 
service be increased, and I know it, and I the only 
man who can render him such a service, I can crowd 
down the value of his service below 5, according to 
the intensity of his desire. Of course I cannot 
crowd it down below a point, which we will call 3, 
at which, rather than continue his service at that 
rate, he will forego the exchange altogether. But 
value may vary between these limits, 10 and 3, ac- 
cording to the varying intensity of our mutual de- 
sires. If it should so happen that both these desires, 
my desire for his service and his desire for mine, 
should increase simultaneously and proportionably, 
value would not be affected ; the exchange would go 
on at the same rate as before. Or if both desires 
should diminish simultaneously and proportionably, 
value would not be affected. The same is true of 
efforts. If both efforts suddenly become twice as 
onerous, or one half as onerous as before, the de- 
sires remaining the same, the value of the two ser- 
vices estimated in each other would stand just as 
before. Thus we see that the natural limits of value, 
and all the variations in value, are to be sought for 
and will be found in the play and interaction of the 
four elements out of which value itself springs. 



96 ELEBIENTS OF POLITICAL ECONOMY. 

We shall now be able to understand clearly what 
is the one universal Law of Value, — a law applicable 
alike to all three classes of exchangeable things, and 
comprehending perfectly all variations in all values. 
This is termed the Law of Demand and Supply. 
Demand is the Desire of purchasing' something' coup- 
led ivith the Power of purchasing it. In other words, 
demand is the desire of one person for something 
from the hands of another, who also desires some- 
thing from the hands of the first, when both are 
willing to part with what they now have from that 
motive. Supply is any exchangeable thing offered for 
sale against any other exchangeable thing. These 
definitions are stated in the most general terms. 

Now, as Value is always a resultant of four ele- 
ments, and only four, ail changes in value must be 
due to change in one or more of these elements rela- 
tivel}'^ to the others ; and the universal Law, which 
shall account for the existence of value, and for its 
amount at both extremes and at all intermediate 
points, must be found in just these elements. These 
elements are expressed in the terms Demand and 
Supply. Market- Value is the rate at which services 
of all sorts are exchanging at the present time in the 
various departments of society. What determines 
that rate? What determines that corn is now selling 
in the market for one dollar a bushel ? Two desires 
come in to determine it, — the desire of people for 
corn, and the desire of farmers for money. Two ef- 
forts come in to determine it, — the eflfort of farmers 
to raise and bring a bushel of corn to market, and 
the effort of people to secure one dollar in money. 
The presence of corn in the market, or its being 



ON VALUE. 97 

ready to be immediately brought there and offered 
in exchange for money, constitutes what is called a 
Supply of corn ; money offered, or ready to be of- 
fered, in exchange for corn, constitutes what is called 
a Demand. This is commercial language, and is 
BufRciently accurate, although it must be remem- 
bered that each commodity in reality constitutes a 
Demand for the other, and is a Supply in reference to 
the other. But, speaking commercially, the money 
ready to be offered for commodities is the Demand, 
and the commodities ready to be exchanged for 
money are the Supply. What, then, is the law of 
market-value? The law of market-value is the 
equation of supply and demand : that is to say, the 
rate of the exchange is adjusted when money enough 
is offered to take off within the usual times the 
commodities on hand. Demand and supply are 
thus equalized, and the current market-rate is deter- 
mined. If demand for any reason becomes quick- 
ened, and the supply not increased, there is compe- 
tition among buyers for the stock in market, and 
market-value tends to rise. If demand becomes 
sluggish, the supply remaining the same, there is 
competition among sellers to dispose of their stock, 
and market- value tends to sink. So far it is the 
action on value of the element of desire, which ex- 
presses itself through demand. How far can this 
action go ? Demand being increased, supply re- 
maining the same, value rises : how far does it 
rise? In the ratio of the increased demand, say 
some ; if the demand be one third increased, the 
value will be one third higher. By no means is this 
true. The value may rise far higher than that pro- 

7 



{•,S ELEMENTS OE POLITICAL ECONOMY. 

portion, or it may not rise in anything like that pro- 
portion. It depends upon circumstances, and upon 
the nature of the commodity. We must remem- 
ber that demand not only acts upon value, but value 
acts upon demand. As value rises, the number of 
those whose means or inclinations enable them to 
purchase at the new rate is constantly diminished. 
There are ten persons who may wish an article at 
one dollar, of whom not over four will wish it at 
two dollars, and perhaps only one at three dollars. 
Every rise in value then, under the influence of in- 
creased demand, tends to cut off a part of that de- 
mand, that is, to lessen the number of those who 
will purchase at the increased price ; and the value 
will rise only to that point, whatever it be, where an 
equalization takes place between the supply and de- 
mand, between the quantity of corn, for example, 
offered at the enhanced rates, and the quantity of 
money in the hands of those willing to exchange it 
for corn at the enhanced rates. Thus we see that 
every rise or fall of demand, and the consequent 
rise or fall of value, tends to check itself. An in^ 
creased demand for any article or service, other 
things being equal, enhances its value ; but the en- 
hanced value in turn lessens the demand by lessen- 
ing the number of those who will purchase, and the 
new market-rate is struck at the point of equaliza- 
tion between the old supply and the new demand. 
Just so, if demand is slackened, value declines ; but 
declining value in turn increases the demand by 
bringing the article within the range of a larger 
number of purchasers, and the decline is arrested at 
the point of equalization between the new demand 



ON VALUE. C9 

and the old supply, and a new market-rate is deter- 
mined. Everything oscillates under the variations 
of demand, but the point of stable equilibrium, if I 
may use the expression of anything so unstable as 
market-value, the point of stable equilibrium is 
always the equation of supply and demand. 

In the preceding paragraph we have supposed 
supply to remain unchanged, and have followed the 
law of value through the variations of demand, 
which, money being invariable, as is here supposed, 
expresses the element of desire. Supply expresses 
the element of efforts, and market-value varies with 
the variations of supply. We have seen that every 
rise or fall of demand tends to check itself, and will 
check itself even without variations in the supply ; 
but it is commonly checked at an earlier point by 
variations in the supply. A brisk demand enhances 
value, and enhanced value commonly stimulates sup- 
ply, and increased supply checks the rise. A slack 
demand lowers value, and lowered value commonly 
lessens the supply by the action of holders and spec- 
ulators, — holders withdrawing their stock for a bet- 
ter market, and speculators buying now when the 
article is cheap, to store away till it shall be dearer. 
Thus rise of value from increased demand is doubly 
checked ; jfirst, by restricting the number of purchas- 
ers, and second, by increasing the supply: the fall 
of value from slack demand is doubly checked ; 
first, by enlarging the number of consumers of a 
now cheaper article, and second, by diminution of 
supply by the action of holders and speculators. 
This law of the equalization of demand and supply, 
thus doubly and harmoniously working, is the most 



100 ELEMENTS OF POLITICAL ECONOMY. 

comprehensive and beautiful law in political econ- 
onriy. It is all-comprehensive. Its operation in the 
field of personal services and in the field of commer- 
cial claims, though perhaps less obvious at first, is 
equally certain and universal as its operation in the 
field of material commodities. But we must note the 
action on value of changes in supply only, demand 
continuing steady. If the supply be short, and cannot 
be increased at all, as is the case with choice antiques 
and certain gems and paintings by the old masters, 
value may rise to any point, and v/ill be struck, as 
before, at the precise point of equality of the demand 
then existing with the supply there offered. The 
French government paid, in 1852, 615,300 francs for a 
painting by Murillo, which had belonged to Marshal 
Soult. The genuine Murillos are comparatively 
few, and their number cannot be increased, and 
their merit causes a strong desire to possess them, 
and their value rises in consequence of the limita- 
tion of supply to a point beyond which no one pur- 
chaser can be found. When this painting was 
offered in Paris for sale, many parties were anxious 
to purchase it, but the equation of demand and sup- 
ply was reached, and its value was determined only 
when one party distanced all other competitors 
and offered a sum greater than any one else would 
give. There was one painting; there could be but 
one purchaser; value rose under the influence of 
demand, and could not be checked by increase of 
supply ; and the equation was complete when the. 
demand was practically restricted to one party, and 
that the highest bidder. The same principle controls 
all sales of this sort. 



ON VALUE. 101 

If the supply, instead of being absolutely limited, 
can only be increased with difficulty, or after the 
lapse of time, similar but less extreme results will be 
observed. Suppose pianos are selling in any com- 
munity at $300 each, and there are twenty persons 
in that community who wish a piano immediately, 
and that there are but fifteen pianos on hand, and the 
number cannot be increased for six months. The 
value will rise above $300. How much above ? To 
that point, whatever, it be, at which only fifteen of 
the twenty will be willing to purchase at the new 
rate. The equation of supply and demand will be 
reached by a rising value which cuts off five com- 
petitors This is the principle, working only roughly 
indeed in practice, — working only by the estimates 
and good judgment of dealers, — but the principle 
is this. A better illustration of this class of cases is, 
perhaps, the grains and other products of the earth. 
When these have been gathered there is no more 
home supply for a year. Any deficiency in the 
crops will raise their value, not at all in the ratio of 
the deficiency, but according to the relations of the 
diminished supply to a new demand. It will de- 
pend on the facility of importation, and other causes, 
but it has frequently happened that an estimated de- 
ficiency of crops amounting to one third has doubled 
and even quadrupled the usual prices.^ 

In the only remaining, and far more numerous 
class of cases, in which the supply of commodities 
and services can be readily and indefinitely increased, 
every rise and fall of value is speedily checked by 
the action of supply ; and the comprehensive and 

1 Tooke's History of Prices. Quoted by J. S. SlilL 



102 ELEMENTS OF POLITICAL ECONOMY. 

harmonious law already referred to keeps value in 
this class of cases comparatively steady. 

The general theory of value has now been given. 
While we shall find no case of value, or its varia- 
tions, which this theory does not cover and explain, 
we shall find particular principles which act in cer- 
tain cases upon demand and supply, and thereby act 
upon value. We have now seen what value is ; how 
it arises ; the elements which alone can vary it ; and 
the universal law which limits it. 



ON EXCHANGE. 103 



CHAPTER IV. 

ON EXCHANGE. 

The strength and safety of our conclusions in 
Political Economy are derived from the simplicity 
and certainty of the forces at work. No man has 
ever denied the great facts that lie at the basis of 
exchange. That men are possessed of desires, that 
efforts are necessary in order to meet these, and that 
satisfactions are the result, are propositions univer- 
sally admitted. From these simple truths spring all 
the laws of our science. Efforts are exchangeable. 
One man may and does put forth the effort neces- 
sary for the satisfaction of another man's desire. 
But since the effort is not for himself but for another, 
and since to put forth efforts is not naturally agreea- 
ble to man, and never becomes so, except in con- 
nection with the satisfaction to which they minister, 
he will demand for his effort some corresponding 
effort made for him. This is a simple fact. No 
man will work for another for nothing. But he will 
work with alacrity and persistency in view of a 
suitable reward. 



104 ELEMENTS OF POLITICAL ECONOMY. 

How now does it happen that society is one vast 
hive of buyers and sellers, every man bringing some- 
thing to the market and carrying something off? We 
speak of the commercial classes, but all classes are 
commercial. Everybody exchanges. You do some- 
thing for me, and I will do something for you, is the 
fundamental law of society. From this results the 
division of employments, and all the various profes- 
sions. Every man brings his own product and ex- 
changes with society as best he may. The farmer 
brings his produce — and exchanges. The mechanic 
brings the product of his skilled labor — and ex- 
changes. The laborer brings his strength, and the 
teacher his knowledge, and they are ready to do ser- 
vice — for a consideration. The merchant, the phy- 
sician, the lawyer, the clergyman, the editor, the 
lecturer, the singer, the actor, and so on to the end 
of the list, are aU in position to render services to 
society, and justly expect to receive an equivalent 
service in return. Indeed, when we look out upon 
society, the most striking thing we observe about it 
is, that these exchanges are going on, in a thousand 
directions at once, determining all employment and 
professions, reaching everywhere and permeating 
everything, and all this the more rapidly and per- 
fectly as knowledge and civilization advance. Since, 
therefo^re, as a matter of fact, men do constantly put 
forth onerous efforts to satisfy other men's desires, 
in order to receive back from them the results of cor- 
responding efforts in return ; since this mutual ex- 
change of services is everywhere present in society, 
not in the market-places only, but in every depart- 
ment of life, there must be in this exchange some 



ON EXCHANGE. 105 

great gain. We now inquire particularly what this 
gain is. What is the motive that leads men univer- 
sally to exchange? 

The answer to these questions will bring us to the 
gratifying conclusion that the laws of exchange are 
based on nothing less solid than the will of God. 
The desires of men are not only various in kind and 
indefinite in degree, but also tend to increase in 
variety and extent by the progress of knowledge and 
freedom. To the gratification of almost all these 
desires, however, there are obstacles interposed, some 
of which are physical and some moral ; and these 
obstacles are so great in all directions, that the pow-. 
ers of the individual man are utterly incompetent to 
surmount them. They mock at his weakness, and 
throw him back upon his destitution. Without 
association with his fellow-men, there is no creature 
so helpless, so unable to reach his true end, as is 
man ; and therefore it is, that the impulse to associ- 
ation is one of the strongest of our natural impulses. 
Men come together, as it were by instinct, into soci- 
ety ; and, associating themselves together in a soci- 
ety, it is very soon discovered, not only that there 
are various desires in the different members of the 
community which are now readily met by coopera- 
tion and mutual exchange, but also that there are 
very different powers in the different individuals in 
relation to those obstacles which are to be sur- 
mounted. There is a vast diversity in natural gifts. 
One man has physical strength, with no mechanical 
ingenuity; another combines with a feeble body a 
v%^onderful knack for contrivance ; a third has a 
philosophical turn, liking to examine into the laws 



106 ELEMENTS OF POLITICAL ECONOMY. 

of nature ; and a fourth has a bent and genius for 
traffic. Now, then, Nature speaks in this diversity 
of gifts in as loud a voice as she can utter, in favor 
of such a degree of association and exchange as shall 
allow a free development of these varying capacities, 
while they work upon the obstacles to the gratifica- 
tion of men's wants which are appropriately oppo- 
site to them. Mr. Carey is right in his principle that 
the degree of individuality depends on the degree of 
association, each advancing hand in hand with the 
other; but he seems to me to be wrong while he 
lacks confidence in the natural forces at work tending 
to the highest degree of association and consequently 
to the highest degree of individuality. There is no 
social force stronger than interest, and interest is 
driving society continually to exchange, and to a 
wider and wider application of the principles of ex- 
change, that IS to say, to a higher and higher degree 
of association, which allows of course a continually 
freer development of individuality. When interest 
fails as a motive power, at least in this department, 
it is vain to appeal to or to trust an inferior and fac- 
titious motive power. 

It is interest that leads men to exchange. It is 
because a given effort put forth for another, in view 
of a return, realizes more of satisfaction than when 
put forth directly for one's self, that exchange ever 
takes place. Why does it realize more ? Because 

THERE IS DIVERSITY OF ADVANTAGE BETWEEN DIF- 
FERENT MEN AND BETWEEN DIFFERENT NATIONS, IN 

DIFFERENT RESPECTS. All cxchangc depends on 
diversity of relative advantage; and diversity of rela- 
tive advantage exists by God's appointment among 



ON EXCHANGE. 107 

individual men, and among the nations. Reserving 
this national diversity for a later discussion, it is 
very clear that a diversity of advantage in different 
things displays itself as between the individuals of 
every community large and small. There is no 
village in which one man has not an advantage over 
his neighbors in the making of coats, another in the 
shoeing of horses, another in the curing diseases, 
another in the keeping a school ; while each of those 
neighbors may have an advantage over each of these 
in some other art or avocation. This diversity of 
advantage in various directions depends, in every 
advanced state of society, partly upon diversity of 
original gifts, partly upon concentration of personal 
effort upon the one set of obstacles that lie in the 
path of a single branch of business, and partly upon 
the use, and familiarity in the use, of the gratuitous 
forces of nature which lend their aid towards over- 
coming these obstacles. As the result of one or two 
or all of these, one man comes to have a legitimate 
advantage over others in his own branch of business, 
whatever it is ; and the others come to have a legiti- 
mate advantage over him in their own branches of 
business, whatever they are ; and if he has desires 
which their efforts can satisfy, and they desires which 
his efforts can satisfy, nothing more is necessary to 
a profitable exchange between them than this rela- 
tive advantage at different points. The tailor and 
blacksmith can profitably exchange their respective 
efforts just as soon as each has a relative superiority 
to the other in his own trade, provided of course each 
has a desire for the product of the other ; and the 
greater the relative superiority of each to the other 



108 ELESIENTS OF POLITICAL ECONOMY. 

the more profitable is the exchange to both. This is 
a point of considerable consequence, and will repay 
some pains in illustration. If the blacksmith can 
shoe horses only a little better than the taUor could 
shoe them, and the tailor make coats only a little 
better than the blacksmith could make them, there 
will be only a slight advantage in their mutually ex- 
changing efforts. For the sake of definiteness, let us 
say, that the tailor's capacity in making coats is 6, 
and his capacity in shoeing horses is 5 ; and the 
blacksmith's capacity in shoeing horses is 6, and his 
capacity in making coats is 5. Each has a relative 
superiority to the other of 1, and if they exchange, 
there is an advantage of 2 to be divided between 
them. Now let us suppose that each, by exclusive 
devotion to his own trade, by developing his latent 
skill and ingenuity, and by availing himself of all the 
forces of nature at his command, comes to have a 
capacity in his own business of 15, his capacity in 
the other business remaining as before at 5. Each 
now has a relative superiority to the other of 10, and 
when they exchange there is an advantage of 20 to 
be divided between them. The motive to an ex- 
change, and the gain of an exchange, are ten times 
greater than they were before. Therefore we lay 
down the principle, as universally applicable to all 
exchanges, that the greater the relative superiority 
at different points, the more profitable do exchanges 
become. If this principle is just, and I flatter myself 
that it will be found to be just, it follows, that every 
man who has anything to exchange, is directly inter- 
ested in the success of his fellow-citizens, that every 
trade finds its advantage in the increasing develop- 



ON EXCHANGE. 109 

maiit of other trades, and that all discoveries and 
inventions by which Nature is made to pay tribute 
To any art is, restrictions apart, so much clear gain 
to the world at large. In the light of sound princi- 
ples, what has been sometimes called the jealousy of 
trade is simply silly. 

All exchange, then, depends on difference of rela- 
ti/e advantage, because without some difference of 
relative advantage, each party could serve himself 
directly just as well as he could be served by the 
other party, and there would be no motive at all for 
an exchange. As soon as there is any difference of 
relative advantage, there begins to be a motive for an 
exchange, and a srain as the result; and the motive 
and the gain become stronger and greater as the dif- 
ference increases ; so that the gains of exchange are 
the greatest in that state of society in which the 
freest opportunity is allowed to every individual to 
employ his peculiar powers in work for which he is 
best fitted, in which desires are so various and em- 
ployments so diversified as to give a chance for all 
kinds of efforts, and in which men avail themselves 
to the utmost of those natural advantages and gra- 
tuitous powers which lie open to their disposal. 
Freedom, association, and invention, are the three 
things which make exchanges as profitable as they 
can become, and which will carry society, so far as 
exchanges can do it, to the highest pitch of prosper- 
ity. Of these by far the most important is freedom, 
because, where freedom is conceded, association and 
invention follow in time by laws of natural sequence. 
By freedom is meant the right of every man to em- 
ploy his own efforts for the gratification of his own 



110 ELEMENTS OF POLITICAL ECOXOMY. 

wants, either directly or through exchange. Each 
man's right of freedom is limited of course by every 
other man's right of freedom which he is not at lib- 
erty to infringe; and also, in certain respects, by what 
is called the general good, of which the judge must 
be the government under which he lives. Under 
these limitations, which limit in common all other 
rights, the right of exchange is just as much of a 
right as the right of breathing. It stands on the 
same unassailable ground. Every man has a nat- 
ural, self evident, and inalienable right to put forth 
efforts for his own well-being ; and whenever two 
men find that by exchanging efforts with each other, 
they can better promote their own happiness, they 
have an indisputable right, subject only to the above 
limitations, to exchange; and it is a high-handed in- 
fringement of natural rights, a blow aimed at the 
life and source of property, when any authority 
whatever interferes to restrict or prohibit the free- 
dom of exchange, except that act be justified by a 
solid proof that other private or public rights which 
are as well based as the right of exchange are in- 
fringed thereby. 

Happily, since governments have become more 
enlightened than formerly, they perceive for the most 
part that they have no right to interfere with this nat- 
ural right of their people, and also, that, by interfer- 
ing with it, they would do them an incalculable in- 
jury. The only motive to a mutual exchange of 
services, is always and everywhere the mutual benefit 
of the parties. After every fair exchange, each party 
is richer than before, has more satisfactions, otherwise 
there would be no exchange. I esteem the servioti 



ON EXCHANGE. Ill 

I receive more highly than the service I render, oth- 
erwise I should not render it. The man to whom I 
render it esteems that service more highly than the 
service he renders to me. We are both gainers. 
And since almost everybody in every communit}' 
has something to exchange, — either service or com- 
modity, and nobody exchanges except in view of a 
gain, it is clear that free exchange benefits every- 
body, and harms nobody. Moreover, under a system 
of free exchange, every man is allowed, under the 
stimulus of self interest, to follow the bent of his 
own mind, to work away at those obstacles to the 
gratification of human desires which he feels him- 
self best able to overcome, and to avail himself of 
all those helps in his work, of which Nature offers to 
him a full store. Under these circumstances, obsta- 
cles give way in all directions : the amount of mate- 
rial products produced and offered for exchange is 
vastly augmented ; the number and variety and 
excellence of the services proffered is indefinitely 
increased; the diversified and rapidly increasing de- 
sires in such a community are readily met by ex- 
change ; all peculiar facilities are taken advantage of, 
and the difference of relative advantage becomes 
great in all directions, and a new day of industrial 
and commercial prosperity is ushered in. Under 
freedom all men have the greatest possible motive 
to produce, because they can dispose of their efforts 
to the best advantage. They can purchase with 
these efforts what they will, and when they will, and 
where they will. Thus freedom leads to extended 
association, and, speedily also, to the invention of 
machinery and all labor-saving appliances. There- 



112 ELEMENTS OF POLITICAL ECONOMY. 

fore, since free exchange indefinitely multiplies, in 
number and variety, the services which men may 
render to each other ; since, by means of it, men's 
satisfactions bear a larger and larger proportion to 
their efforts ; and since the only possible motive 
to an exchange is a mutual benefit of the parties, 
no reason can be given, no good reason ever has 
been given, why exchanges should not be the Ireest 
possible. 

After long centuries of meddlesome and vexatious 
intei'ference with the freedom of industry and the 
rights of exchange, by limiting the number of ap- 
prentices to each artisan, by dictating what should 
and what should not be manufactured or grown, by 
attempting to determine what should and what 
should not be imported and exported, and by arbi- 
trary burdens on certain classes, and arbitrary privi- 
leges granted to others, the more enlightened nations 
of the world have come at length to perceive that 
wealth and power and progress are dependent on 
free exchange, at least within their own boundaries. 
Common sense reigns now, for the most part, in this 
thing, within the limits of the individual nations. 
When Bonaparte brought half of "Western Europe 
under French dominion, the previously existing cus- 
tom-houses and toll barriers of the interior fell as by 
a stroke, and free trade became the rule between 
French, Dutch, Germans, Italians, and Spaniards, — 
all who were subject to his sway. But when his 
vast empire was dissolved into its original independ- 
ent kingdoms, up shot the custom-houses again, 
around all the petty frontiers, and each State was 



ON EXCHANGE. 113 

busy to reimpose on itself the fetters which his 
powerful hand had broken. ^ Just as if the bene- 
fits of exchange depended on the accident that the 
parties to it are subjects or citizens of the same gov- 
ernment ! 

Opposed to free exchange are monopolies. A 
monopoly is a legal restriction imposed by the gov- 
ernment upon the sale of certain services or commodi- 
ties. This restriction is ostensibly laid for the bene- 
fit of certain persons or classes, and limits of course 
the competition to which they would otherwise be 
subject in their business, and tends therefore arti- 
ficially to raise the value of that which the privi- 
leged few offer for sale. If the view be limited to 
these persons alone, monopolies would certainly 
seem to be advantageous, but what of the purcha- 
sers and consumers of their wares ? They all are 
obliged to pay a higher price for what, were it not 
for the monopoly, they could obtain at a cheaper 
rate, since the only object in laying the restriction, is 
to enhance the price for the benefit of those possess- 
ing the privilege. Monopolies, therefore, infringe the 
right of exchange, are unjust and odious in their 
nature, and are in practice abominable. Nearly all 
governments have been chargeable, at times, with 
successful attempts to make things thus artificially 
dear to the mass of the people. Queen Elizabeth 
called the power of granting patents of monopoly to 
her favorites " the fairest flower of her garden." To- 
wards the close of her reign, her abuse of this power 
had reached an intolerable height, and some of the 
most necessary articles of life, such as salt, iron, 

1 Senior. Page 177. 
S 



114 ELEMENTS OF POLITICAL ECONOMY. 

calf-skins, vinegar, lead, paper, and many others, 
were in the hands of patentees, and could only be 
procured at exorbitant prices. In 1601, the House 
of Commons met in so angry and menacing a mood, 
in consequence of this abuse, that Elizabeth was 
obliged to promise at least, that the monopolies com- 
plained of should be abolished. The famous Act 
of Parliament of 1624 declares that all monopolies, 
grants, letters patent for the sole buying, selling, and 
making of goods and manufactures, shall be null and 
void. This Act effectually secured the freedom of 
industry in England; and in the opinion of excellent 
authorities, has done more to excite the spirit of in- 
vention and industry, and to accelerate the progress 
of wealth in that country, than any other in the 
statute book. The Act excepts, however, patents 
for fourteen years to the true and first inventors of 
new manufactures within the realm, and also the 
grants by Act of Parliament to any company, for 
the enlargement of foreign trade. Under this excep- 
tion, the East; India Company possessed, up to 1834, 
the exclusive risfht to vend tea in En2;land. During 
the last years of this monopoly, and notwithstanding 
the quantities of tea smuggled into the country, the 
people of England paid more than $7,500,000 a year 
for their tea beyond the price at which tea of equal 
quality was sold, under a system of free competition, 
in Hamburg and New York. Opium is still, for 
purposes of revenue, a government monopoly in 
British India. In France, tobacco is a close mo- 
nopoly in the hands of government for revenue pur 
poses. It is noticeable that monopolies never real- 
ize to their possessors the full pecuniary advantage 



ON EXCHANGE. 115 

of which the public are robbed by their action. 
Thus, while Englishmen paid |7,500,000 extra an- 
nually for their tea, the Company, by their own 
showino-. did not realize much more than half that 
sum from their privilege ; owing to the inertness 
of their servants removed from the stimulus of com- 
petition. " The spirit of monopolists," says Gibbon, 
" is narrow, lazy, and oppressive. Their work is more 
costly and less productive than that of independent 
artists ; and the new improvements, so eagerly 
grasped by the competition of freedom, are admitted 
by them with slow and sullen reluctance." 

A second form of monopoly is that in which gov- 
ernments by restrictive duties try to exclude foreign 
competition in certain articles, leaving the domestic 
dealers open only to home competition. This is 
done in connection with, sometimes under color of, 
levying duties for revenue. Duties laid for this pur- 
pose, however, as we shall see more fully hereafter, 
are very different in principle, amount, and action, 
from those properly laid for revenue. They violate 
a natural right of exchange, as the others do not, 
and are always followed by injurious consequences. 
Sometimes the hope of unusual gains from pro- 
ducing an article whose foreign supply is thus re- 
stricted, seduces capital and labor from other prof- 
itable channels and concentrates them upon this 
business ; and the home competition, thus artificially 
stimulated, becomes intense and feverish, the busi- 
ness is overdone, an element of distrust and unstead- 
iness is introduced, the weaker houses are ruined, 
and only the stancher firms tide over the depres- 
sion consequent upon overdoing, and control the 



116 ELEMENTS OF POLITICAL ECONOMY. 

market for a while at a monopoly price. But the 
losses of home competitors ; the losses of those who 
would otherwise have been foreign competitors ; 
and especially the losses of those home producers 
who would have exchanged products with those 
foreign competitors, overbalance many fold these 
gains. Sometimes, again, home competition is even 
less active after the imposition of such duties ; and 
then the manufacturers and dealers, relieved, in great 
measure, from the stimulus of competition, are less 
on the alert for improvements, less attentive to the 
quality of their goods, less compliant to their cus- 
tomers ; and the consumers are obliged, not only to 
pay a tax levied for the benefit of the monopolists, 
but also an additional tax on account of their want 
of enterprise and spirit. 

Very different is the third form of monopoly, that 
involved in the granting of patent-rights and copy- 
rights. Society does well in protecting, by law, 
inventors and thinkers in the sole use of their re- 
spective productions for a limited time. Otherwise, 
men would have less motive to think and to invent ; 
since in that case only the public-spirited and the 
rich would or could devote themselves to an impor- 
tant branch of the public progress. A patent or 
copyright is merely a return service which society 
renders for a service received. It violates no man's 
right of property, as an ordinary monopoly does, but 
is a provision to protect a right of property. In 
the United States a patent lasts for seventeen years, 
and is not reissued. A copyright lasts for twenty- 
eight years, and may be renewed by the author, his 
widow, or children, for fourteen years longer. 



ON EXCHANGE. 117 

The great struggles of mankind in all history past 
have been around three points as centres : first, free- 
dom of person; second, freedom of opinion; third, 
freedom of exchange. In consequence of the strug- 
gle around the first point, personal slavery has now 
mainly disappeared from the earth ; in consequence 
of the struggle around the second point, the freedom 
of opinion, and especially of religious opinion, has 
gained great victories in all lands, although much 
remains to be done before its complete triumph is as- 
sured ; while, in consequence of the struggle around 
the third point, one barrier after another has been 
thrown down, one monopoly after another has been 
conquered, until it is pretty generally acknowledged 
at present that freedom of exchange is just as sacred 
as freedom of person and of opinion, and the strug- 
gle wnll certainly never cease until the liberty of 
contract and delivery, subject only to conditions of 
morals, health, and revenue, shall be international 
and universal. 



118 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER V. 

ON PRODUCTION. 

While it is impossible to make discussions in 
Political Economy amusing, it is also impossible 
intelligently to conduct them without constantly 
coming to conclusions which are most cheering. 
We shall find a gratifying law underlying the oper- 
ations of production, which demonstrates that God 
designed man to be a producer, and to produce un- 
der conditions of constantly increasing advantage. 
The world with its forces, and man with his mo- 
tives, are so admirably constructed, that these condi- 
tions of increasing advantage cannot fail, under 
freedom, to redound to the benefit of the masses of 
men. We will first determine what production is, 
and then the cheering law that underlies it. 

Every man who puts forth an effort to satisfy the 
desire of another, with the expectation of a retmrn, 
is, in the language of Political Economy, a Pro- 
ducer. The Latin word producere means to expose 
anything to sale. Our derived word to produce means 
ihe same. A Product is anything thus exposed, that 
is, a service ready to be rendered. Adam Smith, who 
is sometimes called the father of this science, used 
these terms in a restricted sense, and thereby almost 
unfitted them to do their proper work. He confined 
production to the occasioning of changes in material 



ON riiODUCTIOil. 119 

objects. He gifted with the title of producer the 
farmer, the mechanic, the miner, the hunter, and 
fisherman, because they bring to the market a ma- 
terial commodity ; and refused the honor of the terra 
to those who render simple services, however essen- 
tial. This is wrong. It proceeds from an inadequate 
analysis of value. That which is produced, that with 
which we have to do, is not matter but value. They 
who originate value are producers. But we have seen 
that value is not an attribute of matter, but a relation 
of services. The service may be employed upon mat- 
ter, may be embodied in it, but what is really sold is 
not the matter, but the service ; and services are all 
the time being sold, as those of the singer, the teacher, 
the clergyman, which have no connection whatever 
with matter. These services have purchasing-power, 
these persons originate value, and therefore, they are 
producers. Certainly, in an inventory of all values, 
a certain part would be found connected with ma- 
terial objects, but not the largest part. Our lan- 
guage must be broad enough to cover all the cases. 
Therefore, Production is the rendering of any service 
for which something is demanded in return. 

Standing over against Production is its correlative 
Consumption. This word is derived from the Latin 
consumptio ; and, like that word in Latin, has two 
meanings in English ; first, wasting', destroying, or 
second, using, employing. The second is the sole 
economical sense of the word, although many writers 
have not escaped the taint of the ambiguity. While 
many things that are purchased are destroyed as to 
form almost immediately, many other things that 
are purchased are not 'thus destroyed, while both 



120 ELEMENTS OF POLITICAL ECONOMY. 

classes alike by their sale are economically " con- 
sumed." Mr. Senior proposed as an improvement 
in nomenclature, the expression "to use" instead 
of the expression " to consume." But the words 
"to consume," "consumer," and "consumption," are 
too strongly intrenched in our science to be dis- 
lodged; corresponding words in French and Italian, 
though rather derived from consummare than con- 
sumere, are used economically and similarly ; and 
all that is necessary in any case is to define and 
employ them with exactness. To consume is to pur- 
chase anything. The consumer is the purchaser, or 
customer. Consumption is purchase. I have said 
that consumption is the correlative of production, 
but only in this sense, that each party to an ex- 
change is both producer and consumer; each is 
producer as having prepared himself to sell some- 
thing, and each is consumer as being prepared to 
buy something. These words are correlative just 
as demand and supply are correlative. There is 
no production independent of consumption, and no 
consumption independent of production ; and there 
is no need, accordingly, of treating consumption, as 
Wayland and Walker have done, as a separate 
branch of the subject. 

Tw^o things, however, are worthy of notice in 
passing. First, the old definition of Political Econ- 
omy, as the science of the Production, Distribution, 
and Consumption of Wealth, is, when all these 
words have been defined with generality and strict- 
ness, identical in meaning with the new definition, 
as the science of Exchanges; but the latter, never- 
theless, is on every account to be preferred, as carry- 



ON PRODUCTION. 121 

ing the mind directly to the central phenomena of 
the subject. Second, there is in the public, and 
particularly in the popular mind, a false estimate of 
producers in contrast with consumers, as if these 
were separate classes, and as if the producers, that 
is as it lies in their mind, the growers and manufac- 
turers of material commodities, were more worthy 
of encouragements than the consumers of these pro- 
ducts. This is very shallow. Farmers and manu- 
facturers are no more essential to exchange than 
shippers and bankers. Even in this false sense of 
the word, where would the producers be were it not 
for the consumers? Where would production be at 
any one point were it not for production at other 
points, by means of which " to consume " the pro- 
ducts of the first point ? Where would labor be were 
it not for the demand for that which is wrought? 

Now let us examine the underlying law of Produc- 
tion. Production is effort. But efforts are irksome. 
Is there, then, no w^ay to lessen efforts, to make them 
less onerous, and, at the same time, more produc- 
tive ? Yes, thank God, there is ! We may bring to 
our aid the gratuitous help of Nature ! The world is 
full of powers which we may employ to facilitate 
our work. For example, at first people ground their 
grain by hand ; and it was a weary, weary task to 
sit cramped at the mill all day, and turn, and turn, 
and tiirn.^ The eflbrt was great, and the result was 
small. At length it occurred to somebody that the 
weight of water would turn a wheel, and that the 
wheel might turn the mill-stones. Once thought of, 
the water-wheel was soon an actual fact. Instead 

1 Exod. xi. 5 ; Isa. slvii. 2. 



122 ELEMENTS OF POLITICAL ECONOMY. 

of human strength. Nature works now, and what is 
better, works for nothing! Man's service is s1iil 
needed, he feeds the hopper, tends the bags, but he 
does not ache so badly ! Nor is this all. One day's 
labor is now vastly more productive. More grain is 
gTound, bread comes easier to the poor, and the 
wheel which free water turns blesses its millions 
with a cheapened product! 

Let us take another illustration.. The old hand- 
loom was the only means antiquity knew of for pro- 
curing clothing. The shuttle was thrown by human 
muscle. Every thread cost a throw. This work 
was mostly done by women. The word wife is 
supposed by some to have been first derived from 
the word to weave. While the slave woman sat on 
the ground, and turned the handle of the mill to 
grind the grain, the wife was exalted to the dignity 
of the loom, and worked away at the monotonous 
task, thread by thread, thread by thread. Doubtless 
the hand-loom was a great improvement on the 
earlier processes, and was itself gradually improved 
as the centuries went by, each improvement being 
the substitution either of a gratuitous force of Na- 
ture for an irksome human effort, or an easier pro- 
cess of art for a more laborious one. Every step of 
improvement was a lessening of obstacles with refer- 
ence to a given satisfaction. All the way up to 
our present admirable machinery — the power-loom, 
which weaves, as if by magic, while a child can 
tend it — every step has marked a lessening of 
efforts relatively to utilities. The utility, the satis- 
faction, the yard of cloth, has cost less and less of 
human effort, not only to the producer, but, through 



ON FROUUCTIOISr. 123 

exchange, to everybody. Accidental causes in dif- 
ferent countries may interrupt this progress for a 
little time in any single direction, but the law will 
soon assert itself again in spite of these causes. 
And this progress, thus briefly illustrated in the two 
cases of flour and cloth, has been going on, and is 
constantly going on, in all directions; more striking- 
ly, perhaps, in the production of material commodi- 
ties, in which the powers of Nature may be indefi- 
nitely applied by machinery, but at the same time 
there are no services of any kind which are not facil- 
itated in some degree by the progress of knowledge 
and experience ; and the benefits of this increasing 
advantage come home, through exchanges, to every- 
body ; and, consequently, the satisfactions of all bear 
a larger and larger proportion to their efforts. 

This, then, is the underlying and benevolent law 
of production, that God has placed freely at men's 
disposal such materials and forces in Nature, that, 
availing themselves skilfully of these, onerous efforts 
bear a less and less proportion to realized utilities. 
Men have a strong motive to substitute, whenever 
they can, force for muscle, machinery for labor. The 
farmer who used to cut all his meadow-grass with a 
hand-swung scythe, then rake it up with a hand- 
drawn rake, and then pitch it into the loft with a 
handfork, now mows and rakes and pitches with a 
machine. And it is a beautiful consequence of this 
law, that all improvements in machinery, all inven- 
tions, all substitution of Nature's forces for human 
labor, soon become the common property of mankind. 
Patent rights speedily expire by their own limitation, 
secret processes are sure to become known, and the 



124 ELEMENTS OF POLITICAL ECONOMY. 

competition of the different men who, under a system 
of freedom, will be sure to use these gratuitous helps, 
will compel each of them to sell their product at a 
rate graduated only by the actual human service 
rendered ; so that, the liberal gifts of Nature, though 
seemingly monopolized at first by ingenious men, 
are not long intercepted in their descent towards the 
masses of mankind. An invention of great merit 
even at first does not benefit the patentee alone ; as 
a patentee, his interest leads him to lower the price 
of his product, to bring it within the reach of a 
wider circle of consumers ; and so soon as the patent 
has expired, the benefit has at once a wider reach. 
The steam-engine, for example, has long been com- 
mon property. There are, indeed, certain features 
of the more perfect engines still restricted in their 
manufacture by the rights of individuals, and this 
will always be so while invention continues busy, 
but the perpetual tendency in all inventions is from 
individual property towards a common right. And 
it is here in place to remark, that the application of 
machinery to all departments of production, and the 
introduction of improved processes of every name, 
can hardly in the first instance be prejudicial to any, 
and are sure ultimately to be beneficial to all. 

What is the effect on values of these processes 
now made easier in all directions ? Clearly, since 
value is nothing but the relation between two ser- 
vices exchanged, no effect at all is produced on val- 
ues, if the improvements have gone on equally in all 
directions. Everything exchanges just as before. If 
the improvements have not gone on equally, then 
the value, that is, the purchasing power, of those 



ON PKOLUCTIOX. 125 

products is diminished in whose production the im- 
provements have been relatively greater. As the 
service has now diminished, the value, other things 
being equal, has diminished along with it. For such 
a service less can be demanded in return. The 
utility of the product, on the other hand, that is, 
its capacity to gratify desire, remains as before. A 
less effort produces the same utility. The portion of 
effort thus set free, however, is not probably idle. It 
will be still put forth to create a larger number of 
products of the same kind, each one of which indeed 
has less purchasing power than before, but the aggre- 
gate value of which is much greater than before. 
For example, when machinery is employed in the 
making of gloves, which before were cut and stitched 
by hand, the value of a pair of gloves, estimated in 
anything whose production has not been altered by 
a similar improvement, will infallibly decline ; but 
the aggregate value of all the gloves made in the 
establishment will be greater than before, because 
otherwise there would have been no motive to intro- 
duce the machinery. Does, then, the machine origi- 
nate value, contrary to the doctrine in the chapter on 
value ? Not strictly. The machine originates util- 
ity, since each pair of the now increased number of 
gloves has the same utility as a pair of the former 
fewer number ; and the maker is able to render a 
service to a greater number of persons than before ; 
and it is true, that, for a time, especially if the pro- 
cess be not yet generally applied in glove-making, 
before value has a chance to adjust itself to the new 
state of things, he will realize extra gains ; he will 
obtain, in part, the old price for his product, and it 



126 ELEMENTS OF POLITICAL ECONOMY. 

would seem, in this case, as if the machine created 
value. Nevertheless, it is only a transitory state of 
things. Just as soon as machines come to be gen- 
erally employed in the business, value adjusts itself, 
tiirough competition, to the real human service ren- 
dered, and the extra gains of the first operators are 
cut off. The gain of the reduction has now become 
permanent to all consumers of gloves. It is this 
interval between the old price and the new which 
gives to producers the margin for their enterprise, 
and a sharp spur to invent and adopt improvements. 
The improvements once become general, the gain 
redounds to the whole community. The value then 
of all services which have been facilitated by im- 
proved processes, is constantly being lessened rela- 
tively to services not equally facilitated ; and here 
we gain the first glimpse of a truth, which will 
afterwards appear in the clearest light, namely, that 
the value of commodities tends to decline as com- 
pared with human labor, and therefore, that there is 
inwrought into the nature of things a tendency 
towards the elevation of the masses of men in' a 
scale of comforts. 

A leading proposition of production is the follow- 
ing : — Production may go on indefinitely in all direc- 
tions without ever a fear of reaching a general glut 
of pr-oducts. This proposition was first fully devel- 
oped by Say, in the fifteenth chapter of his well- 
known treatise on " Political Economy," and the proof 
of it, and some of the consequences of it, are well 
worthy of our attention. I shall put the proof of it 
in this form : the desires of men which the efforts of 
other men can satisfy, are unlimited in number and 



ON PRODUCTION. 127 

indefinite in degree ; and therefore, mutual efforts 
can continue to be put forth in exchange, until 
these unlimited and indefinite desires of all men are 
all met — a goal which never can be reached. This 
proposition demolishes at a stroke the fallacy which 
pervades Dr. Chalmers' book on " Political Economy," 
namely, that the universal market is limited, and 
therefore, were it not for the unproductive consump- 
tion of the rich and luxurious, and the equally un- 
productive consumption of wars, there would soon 
be a general glut, and production must cease for the 
lack of a vent for its products. What constitutes a 
market for anything? This, that somebody desires 
the service thus offered, and is willing to render a 
return service acceptable to the offerer. Only two 
things can limit the universal market, first, a lack 
of desires, and secondly, a lack of return services. 
But there can be no lack of desires at any time, and 
there will be the greatest plenty of return services 
where production is most busy and most universal. 
Therefore, again, no general glut of products is pos- 
sible to occur. A truth which we have already seen 
in another connection, reappears here as a conse- 
quence of this proposition, and will reappear agam 
and again, namely, that all persons are interested 
commercially, as well as morally, in the prosperity of 
other persons, and each nation which has anything 
to exchange, is directly interested in the prosperity 
of all other nations ; because the more production 
everywhere, the better market everywhere. A mar- 
ket for products is made by products in market. 

But while no such thing as a general glut of prod- 
ucts ever did, or ever can occur, a glut in respect to 



128 ELEMENTS OF POLITICAL ECONOMY. 

certain services is very common. Through want of 
foresight, or miscalculation, particular services are 
offered in too great abundance, or of a kind not 
adapted to the demand, and in respect to these the 
market is truly said to be glutted. This frequently 
happens with editions of books; more copies are 
printed than can be sold at remunerative prices. 
Also when fashion changes, the goods which were 
fashionable, but are so no longer, are apt to be in 
excess of the demand. The only precaution that 
can be taken to avoid losses of this character, is the 
cultivation of foresight, by studying as accurately 
as possible the nature of human desires, and the 
changes that have been observed to take place in 
them. This constitutes mercantile sagacity ; and 
the most successful producers in all departments are 
those who best develop this sagacity, who adapt 
their services to the existing and coming demand, 
who, to excellence in the substance of their services, 
add taste and attractiveness to their form, who tend 
rather to lead the fashions for the many than fol- 
low in their wake. The field of production is like 
the billowy and heaving sea : to navigate most suc- 
cessfully requires foresight, a wise courage, a power 
of adaptation to varying circumstances, skill to veer 
and tack when the wind changes, and a will to run 
before a favoring breeze with all sails set. Produc- 
tion, as a general rule, is no dead level of monoto- 
nous exertion ; since. its sphere is life with its wants, 
man with his desires ; and there is scope for the 
development of ingenious mind in almost all of its 
departments. Since all exchange is due to the 
diversity of relative advantage, whoever develops 



ON rKODUCTION. 129 

his powers of observation, of application, of adap- 
tation, to a higher point, and avails himself more 
skilfully of all peculiar facilities, will reap a larger 
share of the harvest of exchange. 

The immense increase of production, and the su- 
perior perfection of products consequent upon what 
he calls the Division of Labor, was fully pointed out 
by Adam Smith. The chapter in which this author 
treats of the division of labor, has always been the 
most famous, and is still one of the most interesting 
in the " Wealth of Nations." We have already seen 
how exchange is stimulated and made profitable by 
the diversity of employments, and by the applica- 
tion of all peculiar gifts to the corresponding obsta- 
cles which lie in the path of production : this is the 
more general truth of which Adam Smith's prin- 
ciple of the division of labor is a specific part. He 
means by this terra the dividing up of a process or 
employment into particular parts, so that each per- 
son employed can devote himself wholly to one 
section of the process. The proposition is, that by 
means of the division of labor, the processes of pro- 
duction are vastly facilitated. He cites, as an illus- 
tration, the manufacture of pins. One man draws 
out the wire, another straightens it, a third cuts it. 
a fourth sharpens the points, a fifth grinds it at the 
top for receiving the head. The making the heads 
consists of two or three distinct operations, each 
confided to a single person. The remaining proc- 
esses are similarly divided up, and the result is, 
according to Dr. Smith, that in a single establish- 
ment, employing only ten persons, 48,000 pins are 
made in a day, while if each man went through all 

9 



130 ELEMENTS OF rOLITICAL ECONOMY. 

the processes himself, he could hardly make twenty 
pins •■X day, or two hundred for the whole establish- 
menl. Perhaps a more striking illustration of the 
division of labor may be found in the art of watch- 
making. According to evidence brought before a 
committee of the British House of Commons, there 
are one hundred and two distinct branches of this 
art, to each of which a boy may be put apprentice; 
and when his apprenticeship is expired, he is unable, 
without subsequent instruction, to work at any other 
branch. The watch-iinisher is the only person, out 
of the one hundred and two, who is able to work in 
any other department than his own. The causes 
of increased elliciency imparted to production by 
the division of labor are reduced by Dr. Smith to 
three : — 

1. The improved dexterity, corporeal and intel- 
lectual, acquired by the repetition of one simple 
operation. 

2. The saving of the time which is commonly 
lost in passing from one species of work to another, 
and in the change of place, position, and tools. 

3. The invention of a great number of machines 
which facilitate and abridge labor in all its depart- 
ments. Because the simple task which complete 
division of labor gives to each operator is precisely 
what^ machinery may most easily be made to per- 
form, and what the operator, if intelligent, will be 
most likely to devise machinery for. Add to these 
advantages of the division of labor these other : — 

4. The saving of the waste of material, partly as 
the result of this improved dexterity; and frequently, 
also, as the result of the shorter lime required to fin- 
ish up the product. 



ON riiODUGTIUN. 131 

5. The more economical distribution of labor by 
classing the operatives according to their strength, 
skill, and experience. The easier parts may be per- 
formed by women and by children, whose labor is 
less expensive ; the ruder parts by ruder hands ; and 
only the more difficult processes by the most skilful 
workmen, who must be highly paid. Next to the 
first, this advantage is the most important. 

6. There is a saving in tools. The various imple- 
ments, being now in constant use, yield a better 
return for their original cost; and therefore their 
owners can afford to have them of a better quality, 
and this, too, facilitates production. 

7. It brings the producers and consumers into 
more intimate and safe relations. The division of 
labor between the wholesale and the retail trade is 
of great advantage. The retailers know their local 
markets, and supply them without loss or waste from 
the wholesale reservoirs. The wholesale reservoirs 
neatly control the various streams of production, 
according as demand is slackened or intensified. 
Thus, for example, a large city is daily supplied 
with fresh meat, without the loss, perhaps, of a hun- 
dred weight. 

There are some disadvantages resulting from this 
division of labor : — 

1. The work becomes in some departments mon- 
otonous and irksome, while some variety of occu- 
pation would afford relief by employing different 
muscles, or different faculties of the mind. 

2. There is some tendency to dwarf the mental 
and corporeal powers, through exclusive attention to 
une part only of a complicated process. 



132 ELEMENTS OF POLITICAL ECONOMY. 

3. When this part has been learned, and long 
made the means of a livelihood, a person has less 
power to adapt himself to change of circumstances, 
and becomes too much dependent on the continu- 
ance of the business in that form. 

The degree to which the division of labor can be 
carried, depends in part upon the extent of the mar- 
ket, and in part upon the nature of the employment. 
To recur to Dr. Smith's illustration of the pins : if 
the market would only have received 24,000 pins 
a day from that establishment, instead of 48,000, 
the division of labor could not have been carried to 
the same extent, because if it had been, the men 
would be idle one half the time. In that case, some 
of the men would be dismissed, and some of the 
separate processes be combined, and production 
would be less efficient from the limitation of the 
market. Production, therefore, is most profitable 
when the market is broad enough to allow a full 
division of labor, and complete employment to all 
the operatives ; and, the market being presupposed, 
is more likely to be profitable in large establishments 
than in small; because, (1) the division of labor can 
be carried to a fuller extent; (2) more perfect ma- 
chinery can be afforded; (3) relatively less superinten- 
dence is required ; and (4) the scraps and ends of a 
large business are frequently of sufficient importance 
to justify one or more subordinate branches of busi- 
ness in connection with the main business. For 
example, a large saw-mill may profitably furnish 
lath as well as lumber, since the refuse boards and 
slabs may go to lath. A wholesale butchering estab- 
lishment of neat cattle might profitably have, in con- 



ON PRODUCTION. 133 

nection with the sale of meat, a tannery to dispose 
of the hides, a comb manufactory to dispose of the 
horns, a glue manufactory to dispose of the feet, a 
stall for the hair, which is useful in plastering, while 
the offal might be chemically disposed of in fer- 
tilizers. 

The nature of the employment also limits the 
degree to which the division of labor may be car- 
ried. Agriculture, for instance, allows less of this 
division than most other departments of production, 
because its various operations cannot, from the 
nature of the case, become simultaneous. When 
the sowing is once done, the producer must wait 
some months upon Nature, till his agency is again 
required in the reaping. This fact, that agriculture 
can be less facilitated by the division of labor, and by 
the use of machinery, than most other departments 
of material production, constitutes one ground of an 
important truth, which we shall hereafter perceive 
stands also on another and firmer ground, the truth, 
namely, that agricultural products tend constantly to 
rise in value as compared with other commodities. 



134 ELEMENTS OF TOLITICAL ECONOMY. 



CHAPTER VI. 

ON LABOR. 

It is a curious thing, and one that draws after it 
very important consequences, that physical labor 
consists simply in moving things. When a man 
works with his hands, all that he does, or can do, 
is to produce a series of motions. Human muscles 
are only capable of two things, namely, producing 
motion, and resisting motion. All the marvellous 
results of human labor in all the world, have flowed 
from so simple a matter as the contraction and ex- 
pansion of muscle. Work is motion, and weariness 
is weariness of muscle. The world of materials is 
so cunningly constructed, that, when they are moved 
into right position the powers of Nature do the rest, 
and objects of utility are the result. 

When the pioneer fells a tree, he moves his axe 
through the trunk, and then the power of gravitation 
seizes the tree, and brings it to the ground. He pro- 
duces a series of motions upon the tree, but the final 
motion, by which the century-girdled oak comes 
crashing to the earth, is not of his producing. Na- 
ture does that. Wool, cotton, and flax, have by 
nature a certain tenacity of fibre. Man moves these 
fibres in certain relations to each other by an instru- 
ment called a spindle, and the result is thread. Then 
the threads are moved in certain relations with each 



ON LABOR. 135 

other by an instrument called a shuttle, and the re- 
sult is a web of cloth. The tailor moves his shears 
through the cloth, and then his needles, and the result 
is a coat, — the object of utility for which all these 
processes were gone through with. The farmer first 
moves the ground, then moves his seeds into it, 
moves his sickle through the standing corn, moves 
his corn to the granary and mill, moves his meal 
from the mill to the larder, at which last point the 
housewife begins to operate upon it in a new series 
of motions. She moves the meal to the kneading- 
trough, and, having well moved it there, moves it to 
the oven, and, from the oven, after due interval, 
moves it to the table, at which point production 
ceases, and consumption begins. 

Physical labor, then, is, and can be, nothing but 
this, an effort, by which materials or implements are 
moved with reference to a given result. Nature fur- 
nishes all the materials, and all the primary qualities 
of which we avail ourselves in production. She 
cooperates at every step. We pay her absolutely 
nothing for all she does. All we can shirk off our 
own shoulders, and throw upon hers, is so much clear 
gain. And it is a most happy circumstance that 
this is being done more and more completely in the 
production of nearly all commodities. Nature is 
good, to use a commercial term, for all she can be 
made to carry. 

Now, since motion is the only thing which man is 
required to furnish in the production of commodities, 
he naturally looks around for helps in this mattei. 
The first thing he lighted on, as a help to produce 
motion, was the domestic animals. The ox, the ass. 



136 ELEMENTS OF POLITICAL ECONOMr. 

the horse, were doubtless domesticated in the very 
beginnings of society. Men want these animals to 
produce motion for them — simply that. And as 
they can be used in so many different places, and 
for such a variety of purposes, and are so cheaply 
reared, they are exceedingly convenient as a motive 
power, and will probably never be superseded. The 
discovery and application of the great motive powers 
of water and steam have scarcely occasioned a 
lessened demand for the earlier and humbler motors, 
oxen and horses. Some of my readers will probably 
remember the time, when the introduction of rail- 
roads was opposed by some people, on the gi'ound 
that the value of horses, and the business of team^ 
sters would thereby be destroyed. Experience has 
demonsti-ated in this case, as it does in all similar 
cases, that improved machinery, and improved facil- 
ities of all kinds, so far from harming any class of 
persons permanently, are likely to be a gain to all 
classes of persons. At least, they only are harmed, 
who stupidly hold on to the old methods. 

Labor, having employed from a very early time 
as a motive power the domestic animals, secured 
after a while, as inanimate auxiliaries, the water- 
wheel and the windmill; and, much later, the steam- 
engine. It is a point that has scarcely been noticed, 
even if it has ever been noticed at all, that all these 
auxiliaries, whether animate or inanimate, produce 
simple motions of the same kind as, and only sup- 
plemental to, the motion produced by a human arm. 
The most ponderous engine merely reduplicates that 
which the arm of a child is capable of; while in 
point of delicacy and firmness of touch, perhaps no 



ON LABOE. 137 

machinery has yet been devised which can subdivide 
and apply this motion as skilfully as the human 
fingers can. It is said, that some of the lace made 
wholly by hand, is finer and more delicate than any 
yet woven by machinery, although the introduction 
of machinery into lace-making has cheapened the 
product, according to Dr. Ure, to about J„ of its for- 
mer cost. What we call power, then, however pro- 
duced, is simple motion. But in order to subdivide 
these motions and apply them to the various purposes 
of production, implements of all sorts are needed, 
and implements, as we shall see in the next chapter, 
are always the gift of capital. But no power how- 
ever mighty or however delicate, and no implements 
however perfect, can ever dispense with some por- 
tion of human labor. Not until machinery can be 
taught to think, to adapt means to ends, will human 
labor cease to play a chief part in production. These 
therefore, are, and always will be, the three requisites 
of material production : Labor, Power- Agents, Cap- 
ital. 

Besides physical labor, there are the various forms 
of mental efforts put forth by men to satisfy the 
desires of other men, and with reference to a return. 
So far as exertion, physical or mental, is put forth 
for amusement, or for a pure benevolent motive, it 
has nothing to do with Political Economy. It is only 
exertiOfi which demands for itself something in ex- 
change, that is technically labor. Labor, w^hich is 
primarily mental, such as most professional labor, 
the labor of the editor, the teacher, the architect, 
has of course little connection with motion or with 
commodities. But it is not on that account less 



138 ELEMENTS OF POLITICAL ECONOMY. 

useful or less valuable. The exchange of simple 
services depends on the same principles, gives rise to 
the same phenomena, and is amenable to the same 
science as all other exchanges. One man, as the 
violin-maker, offers services in which a commodity 
intervenes ; another, as the violinist, offers services 
in which no commodity intervenes ; each has gained 
in his own art a point of relative advantage as com- 
pared with other men, and these doubtless have 
gained some point of relative advantage as compared 
with them ; each, by the sale of his respective ser- 
vice, meets some desire of the buyer, and is paid on 
the same principle as the other. The violin-maker 
of Cremona, who sold his instruments for five hun- 
dred francs apiece, was no more and no less a laborer, 
in the language of our science, than Paganini, who 
sold an hour's playing in the theatres for five thou- 
sand francs. 

Having now seen what labor is, let us pass to the 
principles that determine its remuneration. I can 
&ee no reason why the purchasing-power of labor is 
not determined in the same way as the purchasing- 
power of all other things; and, if so, there is no 
difficulty in pointing out the general law of wages. 
I go back constantly to first principles, because I 
believe that first principles really control everything. 
Chance effects there most certainly are ; but, as they 
happen now on one side and now on the other, they 
balance each other, and leave all the great working 
forces unaffected. For the sake of convenience, a 
distinction may be made at this point between pro- 
fessional and common labor, — a distinction which 
is not indeed very definite, but which is sufficiently 



ON LABOK. 139 

SO for the purpose in hand. The wages of profes- 
sional labor of all sorts run up and down upon a 
scale whose extremes are much wider apart than the 
extremes of the scale which marks the variations in 
the wages of common labor, while at the same time 
the principle that determines the value of both forms 
of labor alike is the principle that determines all 
other value, namely, the law of Supply and Demand. 
The wages of professional labor, however, are so far 
different from the wages of common labor as to 
demand a somewhat distinct treatment. Why could 
Daniel Webster demand a fee of a thousand dollars 
for attending to a single case in court, Paganini a 
like sum for an hour's playing on a violin, and Jenny 
Lind at least as much for an evening's singing in a 
concert ? Because there was in each case a strong 
demand for a peculiar service, and only one person 
in the whole world who could render that service, at 
least in the same perfection. The demand was 
large, the supply was small, and the value conse- 
quently great. The highest efforts of professional 
skill will always receive a high reward, whenever 
there is one person even, who, together with a strong 
desire for the product, has also the power to give a 
service in return ; and especially whenever there are 
many persons who have a similar desire and power, 
to whom, as in the case of Paganini and Jenny Lind, 
the service can be rendered in common without 
lessening the satisfaction of each individual. That 
the supply is small in these higher regions of skilled 
effort, is due partly to the fact, that Nature is not 
lavish in her gifts of peculiar talents, and partly to 
the fact, that those who have received have assidu- 



140 ELEMENTS OF POLITICAL ECONOMY. 

ously cultivated them, and have reached in conse- 
quence a high point of relative advantage. These 
persons have what may be called a natural monop- 
oly in their respective fields of high effort, because 
there are few others who have the natural gifts and 
the acquired skill which enable them to come in 
competition with them. But the objections which 
lie with such force against artificial monopolies, can- 
not be urged at all against a natural monopoly ; for, 
if the road to excellence be open to all, and no arti- 
ficial obstructions thrown in the paths of any, there 
is no blame but rather praise for him who distances 
all competitors, and demands for services of peculiar 
excellence a large remuneration. John Sartain is a 
superior engraver : he enjoys a natural monopoly in 
the highest walks of that art ; the wages of his labor 
are very high; yet nobody can complain of this, 
since he has had no factitious privileges, but has 
fairly attained his excellence under freedom. Ex- 
change rejoices in all diversity of advantage that is 
the birth of freedom, but reprobates with all her force 
advantage that is gained by artificial restrictions, 
because artificial restrictions always infringe on 
somebody's right to render services for a return ; and 
the right to render services for a return is the funda- 
mental conception in the right of Property, The 
wages oi professional labor, then, are determined by 
the relations between the demand for such labor and 
the supply at hand ; and are usually higher than the 
wages of common labor, because the supply of such 
laborers is restricted by the lack either (1) of appro- 
priate original gifts, or (2) of the requisite industry, 
or (3) of the means of suitable education and train- 
ing. 



ON LABOR. 141 

"Within the great law of supply and demand, there 
are several important subordinate principles, which 
go to vary the wages of both professional and com- 
mon labor, principally through their action upon 
supply ; and it is now in order to consider these, 
before we pass to consider the wages of common 
labor. In common with all the writers who have 
succeeded him, I shall avail myself freeJy at this 
point of the labors of Adam Smith. That writer 
considers that there are certain circumstances in the 
employments themselves, which either really, or at 
least in men's imaginations, make up for a small 
pecuniary gain in some, and counterbalance a great 
one in others. 

1. The agreeableness or disagreeableness of the 
employments will have an influence in determin- 
ing the rate of wages paid to those who engage in 
them. The more agreeable employment will atti-act 
the larger number, and will experience in conse- 
quence the press of competition, and the rate of 
wages will be lessened by the increased supply of 
laborers. The more disagreeable employment will 
feel less the pressure of numbers, and will secure, 
other things being equal, a higher rate of remunera- 
tion in consequence. Among the elements which, 
in spite of the diversity of natural tastes, make any 
employment agreeable or disagreeable to the labor- 
ers, are (1) the less or greater exertion of physical 
strength required, (2) the healthfulness or unhealth- 
fulness of the labor, (3) its cleanliness or dirtiness, 
(4) the degree of liberty or confinement in it, (5) the 
safety or hazard of the employment, (6) the esteem 
or disrepute of it in public opinion. To illustrate 



142 ELEMENTS OF POLITICAL ECONOMY. 

each of these in order, the stone-mason, the glass- 
blower, the scavenger, the factory operative, the 
worker in a powder-mill, the smuggler, will each 
receive a larger compensation owing to the peculiar 
element of disagreeableness involved in his employ- 
ment ; and he will be able to demand and secure it 
through the action of the disagreeableness upon the 
supply of such laborers. Of all these elements, 
public opinion is perhaps the most operative ; and 
if this be favorable to an employment, and some 
social consideration be attached to it, and only com- 
mon qualifications be required for it, the wages in it 
will infallibly be low. This is probably the main 
reason why so many young women prefer to teach, 
rather than be employed in mills, shops, or offices, and 
why the wages of female teachers are so pitifully low; 
although each of the elements of agreeableness spec- 
ified above may also contribute something towards 
the same result. If a business be decidedly opposed 
to public opinion, it must hold out the inducement 
of a large reward, or nobody will engage in it. This 
explains the abnormal gains of the slave-trade, the 
liquor-business, of gambling-houses, and of lotteries. 
2. The easiness and cheapness, or the difficulty 
and expense, of learning different employments, 
will have an influence on the rate of wages paid 
in thera. The more quickly and cheaply one can 
learn to perform the duties of a place satisfactorily, 
the less, so far forth, will be his wages ; because 
there will be many who will compete with him in 
rendering such services ; the more time, difficulty, 
and expense involved in learning a business, the 
larger, so far forth, will be the wages secured by it ; 



ON LABOR. 143 

because fewer persons have the means, the foresight, 
the patience, to prepare themselves for such an avo- 
cation. This is the principal ground of the difter- 
ence in the wages of skilled and unskilled labor. 
The artisan has, at least, given time, and the pro- 
fessional man has given both time and money, to fit 
themselves to render the services which they now 
offer to society ; and it is right, therefore, for them 
to demand a higher rate of compensation than is 
accorded to operatives and common laborers. But 
a right to demand does not always carry along with 
it an ability to secure : in this case it does, through 
the reduction of numbers which these obstacles at 
the entrance occasion, and the consequent weakness 
of competition. To put a boy apprentice to a trade, 
requires on the part of the parents a foresight, an 
ability to get on without his immediate help, and 
sometimes an amount of money for his board and 
clothes, which all parents do not possess ; and con- 
sequently, the number of skilled artisans, who must 
learn when they are young if at all, are relatively 
few compared with common laborers, and are able 
to realize a much higher rate of wages than they. 
In the professions, if we confine our attention to 
those persons who are thoroughly trained for them, 
we shall find a higher rate of compensation still, 
and one made higher on the same principles; 
although we must here bear in mind the coun- 
ter-working influences which tend to increase the 
competition in the professions, namely, the respecta- 
bility which attends them, the desire of knowledge 
for its own sake which is gained in connection with 
them, the instruction wdiolly or in part gratuitously 



144 ELEMENTS OF POLITICAL ECONOMY. 

offered to those in course of preparation for them, and 
the desire to do good, without regard to pecuniary 
reward, which actuates many who enter upon them. 

3. The constancy or inconstancy of employment 
is a consideration that affects wages. If the em- 
ployment be such that it can only be carried on 
during nine months of the year, the wages of the 
day or month will be greater than they would be if 
it could be carried on during the twelve months. 
The laborer looks to the aggregate earnings of the 
year, and will hardly take up a trade which affords 
employment but a part of the time, unless some 
compensation can be found in the higher wages for 
that time. This is the chief reason why the day's 
wages of the mason and the house-painter, in this 
climate at least, are higher than those of the car- 
penter or smith. The coachman, also, may stand 
by his horses half the day or night, with no call 
for his services, and must have, therefore, a propor- 
tionably higher fare from those whom he does 
transport. In general, it is found that men prefer 
a constant employment with a lower rate of wages, 
than an inconstant one, with a prospect of higher 
pay for the particular jobs actually done, and be- 
cause they prefer that, those who take up with the 
other are able to secure a higher rate of pay in their 
less eligible avocation. Counter working this, how- 
ever, are the desires which many men have, for 
intervals of leisure in their business ; and the op- 
portunity to make these intervals subservient to 
another branch of business or means of livelihood. 

4. The amount of trust involved affects wages. 
Men in responsible positions secure a higher rate of 



ON LABOK, 145 

pay for their services than can be acco anted for, eX' 
cept by a reference to the unwillingness of people 
to intrust great interests to others, unless they are 
men of established character for probity. Such 
men, men who combine all the other requisites 
for an important post, with a well-known honesty, 
are comparatively rare ; and, w^hen they are found, 
will receive a very high compensation for their ser- 
vices. Treasurers of corporations, cashiers of banks, 
and holders of trust-funds generally, are examples in 
point. Shall we say, then, that men offer their hon- 
esty in the market, as they offer their skill, and are 
paid for the one as for the other ? No ! Their skill 
has been acquired to sell, and for no other reason ; 
but their honesty, if it be genuine, has another basis 
altogether; and he who is honest, simply because 
honesty is the best policy, is not honest at all ! The 
very characteristic of honesty is that it cannot be 
bought! It has a moral, and not a mercantile foun- 
dation. In point of fact, a man who has the full 
confidence of his fellow-citizens, as an honest man, 
and at the same time all the other qualifications 
requisite for a post of high pecuniary trust, is in 
position, partly on the ground of his honesty, to 
render a high service, and will receive for that ser^ 
vice a high reward ; but I protest, in the name of 
morals, against the notion that honesty is a market- 
able article : it is rather an underlying element of 
moral character, which fits men indeed to render 
certain services, but the honesty is maintained, not 
for the sake of the service, but has an independent 
basis of its own. So, also, most people would pre- 
fer a deeply religious man for a preacher and spir- 

10 



146 ELEMENTS OF POLITICAL ECONOSir. 

itual guide, but it is a perversion of language to 
maintain that in rendering these services a clergy- 
man sells his religion. It is true that he sells ser- 
vices to the appropriate rendering of which his 
personal piety contributes one element ; but the 
piety is not nourished for the sake of the services, 
but for its own sake, and it must not be confounded 
with that which is sold. Accordingly, while the 
clergyman's vocation is sacred, and belongs to the 
sphere of religion, his salary belongs to the sphere 
of exchange, and its determination is wholly a busi- 
ness transaction. This distinction ought to be bet- 
ter understood than it is; and both clergymen and 
people need to be reminded that the spiritual things 
belong to one sphere, and the carnal things to an- 
other. The amount of a clergyman's salary, and the 
time and mode of its payment, are matters of pure 
business; and the clergyman himself is to blame if 
he does not attend to them, and insist on them, on 
business principles. 

5. The probability of success in any employment 
is a circumstance that has some influence on the 
rate of wages paid in it, through the action of this 
probability on the numbers of those who enter upon 
it. If success is problematical, fewer will engage in 
such a business, and those who do engage in it and 
succeed, will reap a very high reward. Ten boys, 
for example, put to the blacksmith's trade, ordinary 
capacity being presupposed, will probably every one 
feucceed in becoming a tolerable workman ; but of 
ten boys of the same capacity put apprentice to an 
engraver, probably not over three would ever reach 
any high degree of skill and success ; and therefore, 



ON LABOR. 147 

I 
the pressure of numbers will be felt much more in 

the former than the latter art. So also, those who 
take jobs by contract, and who consequently assume 
some risks, are usually paid at a higher rate than 
those who do work by the day. It is true that this 
is owing partly to the fact that the contractor com- 
monly uses his own capital, and must therefore be 
paid profits as well as wages, and also that the 
wages of superintendence are due to him as well 
as ordinary wages ; still there is a residuum of 
difference which can only be accounted for by the 
risk he runs of a successful issue. The differ- 
ence in wages from this fifth cause of variation, 
would be greater than it is, were it not for the over- 
weening confidence which most men have in their 
own good luck. This confidence is seen in the rush 
which is always made for newly discovered mining 
regions, and in the facility with which even yet lot- 
tery tickets are sold. It is demonstrable beforehand, 
on the doctrine of chances, that no lottery ticket is 
worth so much as it is sold for, and yet men buy on 
in spite of the demonstration ; and experience in 
California and at Pike's Peak, has sadly taught how ^ 
excessive was the confidence in their own success of 
the men who flocked to those new El Dorados. 

6. Custom and prejudice and fashion, have some- 
thing to do with the determination of wages in some 
departments. Custom, especially in former times, 
has been very operative. The current fees of law- 
yers and physicians have been largely dependent on 
custom, competition merely coming in to decide 
how many such fees a man should get, rather than 
lessening the amount of each particular fee. Cus« 



148 ELEMENTS OF POLITICAL ECONOMY. 

torn determines the rates when men take farms on 
shares. But competition is now breaking down 
custom in all directions, and will soon, I think, 
reign supreme over the economic field. Prejudice 
is closely allied to custom, and has some voice still 
in adjusting wages, as may be seen, perhaps, in wo- 
men's wages, crowded down to a point unreasonably 
low, as compared with the wages of men. Custom 
and prejudice may yield the field, but fashion, which 
is one form of competition, will always have an 
influence over wages. They who lead the styles in 
any department whatsoever, will always offer their 
services to society at an advantage to themselves, 
and their rate of compensation will be legitimately 
higher than the average rate. 

7. Legal restrictions and voluntary associations 
are another cause acting on wages, by acting on the 
supply of laborers. Laws inhibiting or promoting 
immigration, laws appointing the fees and salaries 
of officials, tariff laws, whether prohibitory or only 
restrictive, unequal taxation, and so on, all have an 
agency in adjusting wages. Governments are com- 
ing, however, much more freely than formerly, to 
leave everything except the wages of their own ser- 
vants, and those things which they choose to tax, to 
the simple and safe action of supply and demand. 
The guilds of the Middle Ages, and the trades' 
unions of our own day, are examples of voluntary 
associations for the sake of regulating the wages of 
the members by combined action. The restrictions 
in the old guilds, limiting the number of appren- 
tices to each artisan, determining the time a man 
should serve before he could become a master, and 



ON LABOR. 149 

SO on, were very onerous, and have mostly passed 
away. The trades' unions in this country cannot be 
commended, because they tend to destroy the free- 
dom of personal action, and bring all workmen to 
one level of wages. The spirit of Political Econ- 
omy, which is the spirit of freedom, is against such 
associations for such purposes. If any man has a 
service to render, let him offer it freely, and make the 
best terms he can with whoever wants it. 

Having looked at the principles that determine 
the compensation of skilled labor, and also at some 
causes tending to vary the wages both of skilled 
and common labor, we pass now to a consideration 
of those principles more particularly applicable to 
the wages of common labor. All value, as we 
know, is a resultant of two desires and two efforts, 
and is variable by any variation of either desire or 
either effort. When the laborer offers a series of 
efforts to another person, he does so in virtue of a 
desire for something which that other person has to 
give, for food, clothing, money ; and the other person 
has a desire for the efforts of the laborer, and is 
willing to give in return the food, clothing, money, 
or whatever it may be. The more laborers there are 
who offer their service to this person, the more likely 
he is to obtain the service at a cheap rate, since 
there is a competition among the laborers to secure 
that food, clothing, money, and so on, which he 
offers in return for the service : the more persons, on 
the other hand, who offer food, clothing, money, and 
so on, to the laborers there present, the more likely 
are the latter to receive a high rate for their efforts, 
since there is a competition among employers to 



150 ELEMENTS OF POLITICAL ECONOMY. 

secure such eiforts. The number of employers and 
the amount of that which they offer as return for 
such efforts, constitutes the demand for laborers ; 
the number of laborers willing to render service for 
what is thus offered in return, constitutes the supply 
of labor : the current rate of wages of common 
labor is determined by the adjustment, that is, the 
equalization of the demand and supply. In what 
we have said thus far in relation to wages, we have 
refen-ed chiefly to causes acting on the supply of 
laborers, rather than on the demand for labor: we 
must now look in the other direction, and anticipate 
the discussions of the next chapter, so far as to say, 
that all capital constitutes an immediate and pressing 
demand for labor. Whoever deskes a service which 
a laborer can render, and lays by something to pay 
for that service, creates that instant a demand for 
labor; and especially, whoever accumulates raw ma- 
terials which laborers are to work up, builds, buys, 
or keeps machinery which laborers are to tend, or 
puts himself in position to suffer loss by the owner- 
ship of lands, ships, or other property v^hatsoever, 
unless laborers be employed to make them produc- 
tive, creates thereby an instant demand for labor. 
All such accumulations whatsoever, destined in the 
owner's mind to be employed in further production, 
all implements, buildings, and improvements, de- 
signed to assist labor, and raw materials which labor 
must work up, are capital; and capital must be con- 
stantly united with labor, or the owners will suffer 
an inevitable loss. The presence of capital any- 
where constitutes a demand for labor. The more 
capital there is anywhere, the stronger the demand 



ON LABOR. 151 

for labor; and capital, therefore, is the poor man's 
best friend. Mr. Carey regards the laborer as at a 
disadvantage compared with capital, because the 
laborer must at once dispose of his product, or 
starve ; which seems to me a superficial view of the 
relation, because capital submits to an instant loss 
when it declines to employ labor. Capital does not 
like to lose its profit any more than the laborer likes 
to lose his bread. In a true and general view, the one 
is under just as much pressure to employ laborers, as 
the other to get employment. They come together 
of necessity into a relation of mutual dependence, 
which God has ordained, and which, though man 
may temporarily disturb it, he can never overthrow. 

Labor, then, takes itself to the market to effect an 
exchange with capital. It is only capital that em- 
ploys labor. Now, the terms of the exchange, that is 
to say, the average rate of the wages of common la- 
bor, will depend on the number of laborers compared 
with the amount of capital there present. The ag- 
gregate of all the forms of capital there present, helps 
to make up in the mind of the capitalist his motive for 
employing labor, because the more he has invested 
in buildings, machinery, and materials, the more 
urgent is the necessity to employ laborers, in order 
to make the investment productive ; although only a 
part of the capital is free to be offered in payment 
of wages. Demand for labor is constituted, strictly 
speaking, by that part of the capital which is avail- 
able to be offiered in the form of wages, but it is 
clear, that, as a rule, demand, that is, the portion of 
capital designed for the payment of wages, may 
increase under the influence of increased desire for 



152 ELEMENTS OF POLITICAL ECONOMY. 

laborers, and an increased desire for laborers is a 
necessary consequence of the increase in the aggre- 
gate of capital. Whether the portion designed for 
wages ivill increase or not, on an increase of capital, 
will depend on the number of laborers. It is cer- 
tainly possible that capital may go on increasing, 
while the wages-fund (the portion designed for wa- 
ges) may remain stationary, or even diminish, owing 
to the competition of an increased number of labor- 
ers, and the diminished compensation going to each- 
The number of laborers remaining the same, and 
intelligently comprehending their position, the size 
of the wages-fund will necessarily keep pace with 
all increase of aggregate capital. This point of 
connection between the two, this influence of the 
whole capital on the desire for laborers, and con- 
sequently on the wages-fund, is a point which I do 
not remember to have seen noticed by anybody, yet 
which is obviously of much importance in unfolding 
the relations of labor to capital. Now, wherever 
there is capital there is a wages-fund, and we have 
just seen what the connection is between the whole 
capital and that portion of it which is ready to be 
devoted to the payment of wages. If we call this 
portion of capital, or wages-fund, a dividend, and 
the number of laborers a divisor, the quotient will 
be the general average rate of wages at that time 
and place. This principle invariably determines the 
current rate of wages in any country. If the labor- 
ers are few relatively to the amount of capital, there 
will be a large dividend, and a small divisor, and 
infallibly a large quotient. In the reverse case, when 
laborers are many as compared with the capital 



ON LABOR. 153 

that seeks to employ them, the large divisor and 
small dividend will surely give a small quotient. In 
the first case, capitalists will compete for laborers, 
and wages will go up. In the second case, laborers 
will compete for employment, and wages will go 
down. 

We see now what we are to think of many reme- 
dies popularly recommended for low wages. When 
wages are very low in any country, or in any depart- 
ment of labor, there are some who think that the 
government ought to interfere to better them, at 
least to designate a minimum below which wages 
shall not go ; others propose that strong public opin- 
ion be brought to bear upon employers, to induce 
them to give sufficient wages : others still maintain 
that combinations among the workmen themselves, 
for the purpose of dictating the rate of wages to the 
employers, would be an appropriate and effective 
remedy. Every one of these is a delusion, and so 
is every other proposal that ignores the law of wages 
just established. That which pays for labor in 
every country, is a certain portion of actually accu- 
mulated capital, which cannot be increased by the 
proposed action of government, nor by the influence 
of public opinion, nor by combinations among the 
workmen themselves. There is also in every coun- 
try a certain number of laborers, and this number 
cannot be diminished by the proposed action of gov- 
ernment, nor by public opinion, nor by combina- 
tions among themselves. There is to be a division 
now among all these laborers of the portion of capital 
actually there present. Suppose there has been free 
competition on both sides, and that the average rate of 



154 ELETilENTS OF POLITICAL ECONOMY. 

wages as thus determined, is one dollar per day foi 
each laborer. Suppose that everybody thinks that 
this is insufficient, and that government accordingly 
issues a decree that wages thereafter must be one 
dollar and a half per day to each laborer. This de- 
cree has no tendency to increase the size of the 
wages-fund ; that is determined by the general pro- 
ductiveness of labor, and by the division, under free 
competition, between wages and profits ; if the de- 
cree, therefore, were carried out, as it never could be, 
the result would be that only two thirds of the 
laborers there present could be employed at all, 
and the remaining third must be supported by char- 
ity, or starve. The wages-fund is only sufficient to 
give to all the laborers a dollar a day, and if the 
government enforces a new distribution at a rate 
one third higher, then one third of the laborers can- 
not be employed at all. There is no use in arguing 
against any one of the four fundamental rules of 
arithmetic. The question of wages is a question of 
Division. It is complained that the quotient is too 
small. Well, then, how many ways are there to 
make a quotient larger ? Two ways. Enlarge your 
dividend, the divisor remaining the same, and the 
quotient will be larger : lessen your divisor, the divi- 
dend remaining the same, and the quotient will be 
larger. All accessions to capital, all investment of 
profits in an enlarged business, all saving from ex- 
penditure for the sake of further production, will 
increase the dividend, and, the number of laborers 
continuing as before, the rate of wages will rise. 
Or, if there be no accessions to capital, the wages- 
fund consequently standing as before, and the num- 



ON LABOK. 155 

ber of laborers be diminished, as by emigration to 
new fields of effort, or by enlistment in armies, the 
divisor will be lessened, and the rate of wages will 
rise. The reversed suppositions will give, of course, 
reversed results, and wages will go down. 

Though not in the way proposed, there is a way 
in which government may act most beneficially 
upon this matter of wages. By faithfulness to its 
peculiar trust, that is to say, by making the rights 
of person and property as secure as possible, it gives 
an impulse to enterprise, a spur to industry, makes 
the desire of accumulation effective, and thus indi- 
rectly but most powerfully contributes to the in- 
crease of capital, to the fund out of which wages 
are paid. Also, by fostering the means of educa- 
tion, and by the diffusion of knowledge among all 
classes, government acts beneficially upon the labor- 
ers, to make them intelligent, to impart to them that 
character and self-respect which fits them, in ex- 
changing services with capital, to demand and secure 
their full rights in the exchange. It is not denied 
that capital takes advantage of the ignorance and 
immobility of laborers, and sometimes secures their 
services at a less rate than the just relations of 
capital to labor then and there would indicate, but 
the remedy for this is not in arbitrary interference 
of government in the bargain, but in the intelligence 
and self-respect of the laborers which shall fit them 
to insist on a just bargain. In this whole sphere of 
exchange, the just and comprehensive rule always 
will be, that when men exchange services with each 
other, each party is bound to look out for his own 
■nterest, to know the market-value of his own ser- 



156 ELEMENTS OF POLITICAL ECONOMY. 

vice, and to make the best terms for himself which 
he can make. Capital does this for itself, and la- 
borers ought to do this for themselves, and if they 
are persistently cheated in the exchange, they have 
nobody to blame but themselves. Government 
should give them all facilities for intelligence j 
they should give themselves a character, and cher- 
ish a hearty self-respect, which there is nothing in 
their position to diminish : towards such laborers, 
capital occupies no vantage ground in an exchange 
of mutual services. 

Public opinion can do something towards better- 
ing the wages of labor, in countries where they are 
low, by organizing means to assist the laborers in 
distributing themselves at points where their ser- 
vices are most in demand. Societies in our sea- 
board cities, whose object it is to aid immigrants to 
pass on from those cities where labor is very abun- 
dant, to the country towns and to the West, where it 
is relatively much less so, are commendable in their 
purpose and spirit. So also are emigration societies, 
in countries situated as Ireland has been, where cen- 
turies of misgovernment combined with centuries of 
ignorance, produced a temporary pressure of popu- 
lation on the means of support. Where such pres- 
sure exists, as it does also in China, it is a good 
thing for public opinion to be favorable to emigra- 
tion to newer and more fortunate countries, and 
liberally to assist in the distribution of labor to those 
points, wherever they may be, where capital is ready 
and anxious to employ it. 

It may surprise some who are familiar with books 
on Political Economy, that I do not here adduce the 



ON LABOR. 157 

influence of public opinion in restraining population 
as favorable to wages, and inveigh against the force 
of that spring of population which the Creator has 
coiled up in the nature of man, as compared with 
the weakness of that power by which the earth pro- 
duces sustenance for man. Mr. Malthus, and other 
economists, have discussed at length the tendency in 
the law of human fecundity to outstrip in its results 
the law of diminished returns from land ; and have 
expressed an apprehension that the time may come 
when the earth shall be unable to support her chil- 
dren. They have enlarged upon the well-known fact 
that in the United States population doubles every 
twenty-five years ; and have calculated that, at this 
rate, the inhabitants of every country would, in the 
course of five centuries increase to above a million 
times their previous number; that the population of 
England, for example, would, at this rate, in that 
time, exceed twenty million millions, — a population 
which could not get standing-room there. Such a 
rate of increase certainly needs to be checked; and 
Mr. Malthus divides the checks to population into 
the positive and the preventive. The first increase 
the number of deaths, the second diminish the num- 
ber of births. The principal positive checks are war, 
famine, and disease ; the principal preventive check 
is prudence. Of course it is better that the check 
which limits fecundity should come into play, rathei 
than those which decrease longevity ; and these writ- 
ers are at pains to inculcate upon the laboring classea 
prudence in marrying, and temperance after marriage. 
These discussions are interesting in themselves, and 
have attracted much attention ; but I cannot rearard 



158 ELEMENTS OF POLITICAL ECONOMY. 

them as particularly pertinent to discussions on 
wages. God has endowed mankind with a strong 
impulse towards procreation. But experience has 
shown that it is not too strong for the purposes for 
which it was given. Experience has also shown 
that, as society advances, and men come more and 
more under the influence of reason, and affection, the 
preventive check comes silently and effectually into 
operation. Experience has shown also that food and 
comforts have more than kept pace with the stride 
of population ; since the inhabitants of the world, as 
a whole, were never so well fed and clothed and 
housed as now. The abstract antagonism of the law 
of the increase of population with the law of the 
increase of food is admitted ; but he who is author 
of the laws is author also of natural counter-work- 
ings of them ; so that a practical tendency towards 
their coming into conflict is denied. Each human 
being is as much constituted by Nature to receive 
services as to render them, and each is naturally able 
to become a capitalist; economical laws present no 
obstacles to all men's becoming rich ; most men are 
unwilling, some are unable, to fulfill the moral con- 
ditions of getting rich ; while scarcity of food has 
been caused much more by the maladmiiustrations 
of government than by the law of population. 

But will not strikes accomplish that for the raising 
of wages which neither government nor public opin- 
ion can effect? A strike is a combination among 
workmen for an increase of wages. They agree to 
stop work altogether until their employers shall com- 
ply with their terms, and raise their wages to a cer- 
tain definite sum. It is not to be denied that work- 



ON LABOK. 159 

men thus possess, under many circumstances, a very 
considerable reserved power which they can bring to 
bear upon their employers. When the processes of 
production are going briskly forward, when the man- 
ufactory is thoroughly furnished with competent 
hands, and profitable orders are in waiting, it is no 
laughable thing for the owner to be told, of a cloudy 
morning, that his hands have all stopped work, and 
refuse to lift a finger, until he shall agree to pay them 
wages at a rate which they themselves dictate. Of 
course, his first impulse is to discharge every man of 
them, and endeavor to fill his factory with new hands 
But this he cannot always do. At best it will take 
time. Meanwhile his wheel or engine must be idle, 
customers be lost, orders unfilled, and profits no- 
where. And so, many an employer has surrendered 
to a strike, when he felt that it was all unjust, rather 
than undergo a still greater loss. It is admitted that 
workmen may sometimes strike and gain their point, 
but it is none the less true for all that, that strikes 
are false in theory and pernicious in practice ; that 
they spring from utter misapprehension of the true 
principles of wages ; that they embitter relations 
between employers and employed which ought to be 
cordial and free ; and that they rarely or never are 
permanently advantageous to the workmen them- 
selves. 

In the first place, then, strikes are false in theory. 
It is a very old adage, that it takes two to make a 
bargain. Express this in the language of Political 
Economy, and it will take this form : When two 
men have mutual services to exchange, let them 
come to a fair agreement as to the terms on which 



160 ELEMENTS OF POLITICAL ECONOMY. 

they will exchange. Certainly, let each make the 
best tern:is he can, but let the bargain always be free. 
If one party, who happens to have the power to do 
it, uses compulsion upon the other, it ceases to be a 
bargain at all, and becomes a sort of robbery. If, 
driving with my good horse along a lonely road, I 
meet another man driving an inferior one, and he, 
being the stronger man, compels me to exchange 
horses, it may be all very well for him, but I protest 
that it is no bargain. It is robbery. Now, workmen 
bring a certain valuable service to the market, just 
such a service as the capitalist wants, and he has to 
offer just such a service as they want, namely, wages. 
Now let them come to a free and fair agreement on 
the terms of their exchange. Let the workmen by 
all means make the very best terms they can ; let 
them insist to the last penny on all which they can 
get elsewhere, for the value of their service is deter- 
mined, as the value of every other service is deter- 
mined, by what it will bring. Let the employer do 
the same. Let a fair bargain be struck. There is 
no objection to this kind of striking ; and the more 
intelligence and skill and self-respect a workpian has, 
the better prepared he is to strike the bargain and 
secure his just due. K the employer will not yield 
him this, let him have done with it at once, and go 
elsewhere. Or, if a just bargain has been struck, 
and afterwards circumstances shall so alter that he 
thinks he can rightfully demand more, let him frankly 
demand it, remembering always that it is an ex- 
change he has to do with, and that it takes two to 
make a bargain. If he does not get for his service 
what he thinks he ought to get, let him quit. He 



ON LABOR. 161 

has a perfect right to quit. All this is legitimate 
and fair and above board. 

But a strike is wholly different. This brings com- 
pulsion into play. A combination among workmen 
to leave an employer in the lurch, and especially a 
combination which forces into its ranks by cajoling 
or menaces, those who are unwilling to join it, is of 
itself a confession of the injustice of the claim. If 
the claim be just, there is no occasion to extort it. 
If the value of the service rendered be equal to the 
sum demanded, if this can be obtained elsewhere, 
there is no need of consultation and conference, com- 
bination and conspiracy. Let each man go quickly 
where he can get the most for his service. The fact 
that this is not done, that means are brought to bear 
upon the employer which are not ordinarily used in 
bargains, — means of the nature of a threat — that 
the justice of the claim is not relied on in a case 
where, more than anywhere else, justice can enforce 
itself, that full and free explanations are not had, 
that no notice is given, that great damage is ex- 
pected by their action to accrue to the employer, all 
this seems to forget that the transaction between 
employers and employed is a case of pure exchange, 
a simple bargain of one service against another ser- 
vice. Therefore, I say, that strikes are false in 
theory. 

But this is not the worst of it. Strikes are per- 
nicious in practice. And the reason for this is that 
they tend to lessen the wages-fund. The produc- 
tion of all material commodities is a joint process. 
Capital and labor both conspire in it. The gross 
returns belong wholly to the capitalists and the labor- 



162 ELEMENTS OF POLITICAL ECONOMY. 

ers. The profits of capital and the wages of labor 
are paid out of these returns and from no othei 
source. It is for the interest of both capitalists and 
laborers that these returns be as large as possible, 
because they are wholly divided between the two, 
and if the whole be large the parts will also be large. 
Profits being taken out, the rest is wages-fund ; or, 
more strictly speaking, wages-fund being taken out, 
the rest is profits. It makes no difference practically 
that the wages have been advanced to the laborers 
while the production was still going forward, since 
the wages really come out of the proceeds of the 
joint process. The capitalist never means to pay 
wages out of his previous accumulations, and ought 
not to be expected to do so, and were he obliged to 
do so, it would soon be worse for the laborers, since 
these accumulations are the only stock which sup- 
ports labor. It is not only just but needful for the 
laborers, that wages shall be paid out of the pro« 
ceeds of that on which labor is now expended. 
Whatever, then, tends to lessen these proceeds, 
necessarily lessens the wages-fund. Any interrup- 
tion of the process of production by strikes, any 
want of full and hearty cooperation between the two 
parties to the joint process, will, if continued, infalli- 
bly make the wages-fund smaller. 

Suppose it takes three months to realize the re- 
turns in some branch of manufacture. If, when the 
workmen are paid off at the end of one three months, 
they all strike at the beginning of the next, and both 
parties hold out for three months, what is now the 
chance for higher wages? It shall go hard even if 
they get as much as before. And why ? Because 



ON LABOR. 163 

the mill has stood idle, and the owner has lost three 
months' profits on the whole investment connected 
with the mill. They have lost wages for three 
months, and now when they come to begin again, 
they may not be able to wait, as before, till the end 
of the cycle, and their wages must be advanced out 
of a fund smaller than it would have been but for 
the strike. The employer usually advances wages 
out of his own, or borrowed capital, expecting to be 
repaid from the results of current work. Sometimes 
his mere expectation of large returns acts favorably 
on the wages-fund. But this employer has lost 
profits and customers by the strike, and his business is 
disarranged. His workmen by inflicting a loss upon 
themselves have found an opportunity of inflicting 
a loss upon him. Their loss is undoubtedly the 
greater of the two. Therefore, I say, strikes are 
commonly, and almost necessarily, a disadvantage 
to the workmen themselves. The case just put is a 
strong case to show the principle involved, but all 
interruption whatever to the processes of production 
by strikes, all consequent embittered relations be- 
tween employers and employed, all want of hearty 
working together of the labor with the capital, tend 
to diminish the gross returns, and consequently, both 
the wages-fund and profits. As far as this point is 
concerned, there is no sense or reason in the common 
jealousy of workmen towards employers. There is 
no real antagonism between them. Their interests 
lie along the same line. They are partners in the 
same concern. Workmen who are intelligent, pru- 
dent, skilful, will infallibly get their due. Employ- 
ers who are humane, urbane, fair, will find their 
account in it. 



164 ELEMENTS OF POLITIOAL ECONOMY. 

In this whole discussion it has been needful to 
treat of laborers as if they formed a distinct class 
of themselves, and as if the class were represented 
by a certain average laborer receiving an average 
rate of wages. As a matter of fact, the class labor- 
ers shade constantly into the class capitalists, and 
there is great diversity iti the wages of individuals 
according to their character and skill. This, how- 
ever, does not militate against the principles already 
laid down. 

It has been proven many times by experience that 
the legalized use of an inferior money operates de- 
cidedly against laborers as a class, as well as against 
those in receipt of fixed incomes. Wages experi- 
ence very late the rise of prices consequent upon a 
depreciated currency ; because laborers as a class 
are slow to perceive the change in the purchasing- 
power of the medium, and are consequently slow to 
insist on their just rights in the now altered circum- 
stances ; while the fall of wages, late to rise under 
a poor money, is apt to be prompt enough under a 
return to better money, because employers see the 
change at once, and act quickly in accordance with 
their own interests. In general, it may be said, that 
all departures from sound legislation, particularly in 
regard to money and taxation, are sure to make 
against the laboring classes, and the only certain 
remedy for such legislation is in their own intelli- 
gence and vigilance. 

Laborers work for the sake of wages, but it is an 
honor to human nature that there are very few men 
who would be willing to work at any wages in doing 
things that they know to be useless. For example, 



ON LABOK. 165 

to carry stones from one heap to another, and then 
carry them back again, for no ulterior purpose, is a 
task that few would be content to perform even for 
very high wages. Man is not a machine. His mind 
must be somewhat interested in the work of his 
hands; and this is another point at which our field 
of Economics touches the field beyond of Aims and 
Ends. 

In discussing labor and wages, it will be noticed 
that I have made no reference to a subject a good 
deal agitated at present in Europe and somewhat 
also in the United States, namely, to cooperation. 
This is a scheme originating with laborers them- 
selves, under which they combine, either to purchase 
their necessaries in common and hence at cheaper 
rates because avoiding all profits of middle-men ; or, 
more especially, to engage in joint production, the 
workmen furnishing the capital, all being copartners, 
and of course all sharing pro rata the profits of the 
concern. All this is well; and in countries w^here 
laborers are under traditional disabilities, it may be 
very promotive of their welfare ; but any one can see 
that no new economic principle is involved in it. 
The workmen unite the character of capitalist and 
laborer in their own persons, and both receive wages 
and share profits ; but the principles which determine 
the amount of each are the same as if the two went 
in opposite directions. The practical success of the 
scheme will depend in each case upon the question 
whether there be any of the workmen of sufficient 
organizing and executive ability to carry it through, 
Workmen should have a chance to do this every- 
where : it is done essentially whenever two or more 



166 ELEMENTS OF POLITICAL ECONOMY. 

workingmen organize a firm to carry on any busi- 
ness. In the United States the greatest freedom 
prevails ; there is nothing to hinder any laborer from 
becoming a capitalist ; nearly all our capitalists were 
formerly laborers ; the savings-banks are open for the 
smallest gains ; and the shares of most joint-stock 
companies are open to everybody who has means to 
buy them. There is only one consideration that 
seems to justify in this country any special jealousy 
of laborers as such, towards capitalists as such ; and 
that is the fact, that the legislature does sometimes 
confer, by means of corporate charters, and other- 
wise, certain extraordinary rights upon capital. So 
long as capital and labor rest solely upon their nat- 
ural rights, neither can have the advantage of the 
other ; but so far forth as advantage is given to capi- 
tal by law, it is unjust to labor, and ought to be 
vigilantly watched and counteracted by laborers. 
The legislature, whether state or national, cannot be 
too scrupulous in this whole matter. The proper 
limits of legislative action upon economical subjects 
are pretty narrow. Capital and labor should both 
have the utmost liberty of action compatible with 
social security ; and the equal rights of each will, in 
general, best be reached by leaving both to take care 
of themselves, subject only to general laws relating 
to person and property. If the legislature yields to 
special claims of capital, it must expect to hear labor 
also knocking at its doors. If capitalists " strike " 
for artificial profits by means of a protective tariff, 
why may not laborers " strike " for artificial wages ? 
The former have set the latter a bad example. Much 
of the recent discontent of labor has come from this 



ON LABOR. 167 

greed of capital demanding and securing for itself 
special privileges. Let alone. Legislatures are not 
wise enough to settle the great questions involved 
between capitalists and laborers. They are not wise 
enough, and never will be, to say, for example, how 
much wages capitalists shall pay, or how many hours 
per day adult laborers shall work. To attempt to 
regulate any such things as these by legislation is 
an economic abomination. 



138 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER VII. 

ON CAPITAL. 

The three requisites of production are labor, 
power-agents, and capital. Of the first we have 
now learned what can be learned, without attending 
in turn to its counterpart — capital ; of the second 
we have learned already that all the powers of Nature 
work gratuitously in the service of man ; and of the 
third, we are now to learn what it is, how it arises, 
how it works, and what its influence is upon the 
progress and amelioration of society. Political econ- 
omy is able to show that there is no natural opposi- 
tion of interest between capitalists and laborers ; 
that capital is just as dependent on labor as labor is 
dependent on capital; that each is equally interested 
in the prosperity of the other, and that thus a deep 
and admirable harmony subsists in this part, as in 
every other part, of the social organism. 

The word Capital is derived from the Latin caput, 
3. head, a source, and gives intimation in its etymol- 
ogy -of its scientific meaning. The word caput is 
often used in classical Latin for a sum of money 
put out to interest, and. its derivative capitale is also 
used in the same sense, at least in medieval Latin ; 
and from this form of the word have come into 
English not only Capital, but also, by corruption, 
Cattle and Chattels. Flocks and herds were at one 



ON CAPITAL. 169 

time the principal wealth of our ancestors, and the 
same word came to be spelled differently as applied 
to animals, or to inanimate things of value. The 
notion implied in our word source came along in all 
these words, and hence Capital may be scientifically 
defined as any valuable thing., outside of 7nan him- 
self, from whose use springs a pecuniary increase or 
profit. 

The definition that I formerly gave, namely, '■'■ Cap- 
ital is any product reserved to be employed in further 
production" is indeed equivalent to the one now 
given, but it does not so distinctly exclude personal 
services from the category of capital. The boun- 
dary line between labor and capital cannot be clearly 
drawn, unless the physical, mental, and moral pow- 
ers of man himself, so far as these come into play 
in personal services, are discriminated from the ex- 
ternal commodities and claims, which alone can be 
properly capital. Labor is the exertion of physical 
and mental powers for the sake of a return. Its 
remuneration is wages. Its principles have been al- 
ready unfolded. Capital, on the other hand, is some 
valuable thing, always a commodity or a claim, 
reserved from immediate use in enjoyment for the 
sake of an increase to its present value through its 
employment productively. 

It is fair to apprise the reader that this definition 
is somewhat different from that given by any other 
writer. Mr. Carey defines capital as "the instru- 
ment by means of which man obtains mastery over 
Nature," including in it the physical and mental 
powers of man himself, and thus hopelessly confuses 
the boundaries between capital and labor. Mr. Mac- 



l^O ELEMENTS OF POLITICAL ECONOMY. 

leod defines capital as "any economic quantity used 
for the purpose of profit," making it expressly inclu- 
sive of professional talents, and this seems to open 
the definition to the previous objection. Most writ- 
ers, I think, would define with Mr. Senior, "an arti- 
cle of wealth, the result of human exertion, employed 
in the production or distribution of wealth." Be- 
sides the inherent ambiguities in the word "wealth," 
this definition is indistinct, as not indicating whether 
commodities only, or commodities and claims only, 
or commodities and claims and personal powers, 
may be capital. 

I have considerable confidence that the definition 
now given will be found to cover all the cases, to 
obviate many difficulties, and to take the life out of 
many disputes. Personal powers are used for the 
sake of a return ; capital is used for the sake of an 
increase. Personal powers cannot be parted with, 
although their exercise gives birth to value ; capital 
can always be parted with, and become fruitful in 
the hands of another. When it is said that a young 
man's integrity, or his acquired skill, is his capital^ 
the word is used in a metaphorical, not in a scien- 
tific sense. The meaning is, that these qualities are 
like capital in some respects. Of course it will be 
understood that the Class Capital is a smaller class 
under the great Class Values; and that the same 
article of value may be at one time capital, and at 
another time not capital, according to its destina- 
tion. Money in the hands of individuals is some- 
times capital and sometimes not, although the whole 
money of the nation, considered as belonging to the 
nation, is wholly capital. Credits, that is to say, 



ON CAPITAL. 171 

claims for the payment of money or other valuables, 
are capital or not, according as they are kept for 
convenient use, or for accruing profit. Any piece of 
transferable property may become capital, either as 
retained by the present owner for the sake of a 
greater than its present value to be obtained by 
means of it, or as purchased by another person with 
the same intent. 

There are many products devoted to immediate 
consumption ; that is to say, to the gratification of 
present desires, without any reference to the render- 
ing of future services by means of their help. Such 
products are not capital. They are a portion of the 
wealth of the community, they are valuable, but 
capital they are not. All capital is wealth, but all 
wealth is not capital. Only that portion is capital 
which employs, assists, and pays for labor. All raw 
materials are capital, all machinery is capital, all 
funds destined to purchase these, and all funds des- 
tined for wages, are capital. As all values reside in 
services exchanged, so all capital resides in services 
accumulated with reference to an ultimate exchange. 
It is only in the intention of the owner that capital 
can be discriminated from other products destined 
by him for the gratification of himself and his family, 
or for benevolent purposes. Take a hardware manu- 
facturer, for example, and he has a stock on hand of 
finished hardware, a part of the proceeds of which 
he will put back into his business in the form of 
materials, tools, and wages, and another part will go 
in the form of personal and family expenditure, and 
it is only his intention that discriminates the first 
part, which is purely capital, from the second part, 



172 ELEMENTS OF POLITICAL ECONOMY. 

which, as far as he is concerned, is not capital at all. 
It may indeed become capital in the hands of those 
to whom he pays it out ; and will become so, in case 
they destine it as an aid to further production in 
their several lines of business. The whole mass 
of capital, then, in any country, is the whole mass of 
those products, of whatever kind, which are destined 
in the mind of their owners to be retained as an aid 
towards rendering future services to society. 

How does capital arise ? We have seen that 
there are obstacles which lie in the way of the grati- 
fication of men's desires in all directions, and that 
these obstacles can only be removed by human effort. 
When a man devotes himself to one set of these 
obstacles, with a view to surmount them, he is not 
long in discovering, that if he had certain tools, his 
work would be greatly facilitated ; and having dis- 
covered that, it will not be long before he will at- 
tempt himself, or induce others to attempt, to invent 
such tools. The beaver gnaws down the tree with 
his teeth, from generation to generation ; but man is 
a being more nobly endowed than the beaver, and 
no sooner had he occasion to fell trees, than some- 
thing of the nature of an axe suggested itself to his 
ingenuity. It is true, that his earliest attempts at 
axe-making were probably of the rudest sort, but 
just as soon as anything was devised, whether of 
flint or shell or metal, that rendered easier the labor 
of felling a tree, capital made a beginning along that 
line of obstacles. Among the more gifted races, 
progress in this direction was perhaps more rapid 
than we are wont to think it was, since Tubal-cain, 
even in the times before the flood, is said to have 



ON CAPITAL. 173 

"hammered all kinds of implements out of copper 
and iron." At any rate, we are at no loss to explain 
the origin of capital: it is found in the motive that 
exists everywhere, and that always existed, to lessen, 
if possible, a given irksome effort that is the condi- 
tion of a given satisfaction. And this origin of 
capital gives the key-note to its universal use and 
indefinite expansion. Tools are invented and em- 
ployed for no other reason than this, that, by means 
of their help, the human effort is lessened relatively 
to a given satisfaction. The powers of Nature, 
such as those which make the grain grow, bring the 
tree down, turn the water-wheel, impel the locomo- 
tive, and send the message round the world, all stand 
ready to slave in the service of man ; but in order to 
make their aid available for human purposes, there 
must be a plough, an axe, a wheel, an engine, an 
electric machine. These, and all other implements 
whatsoever, from the tiniest needle to the most pon- 
derous engine, are products created and retained for 
the sake of further production. They are capital. 
They are not capable of yielding in themselves 
an ultimate satisfaction to human wants, but they 
mediate between the powers of Nature, which they 
enable us to make available for our purposes, and 
those ultimate satisfactions. Nature furnishes all 
the powers, and all the natural qualities of objects, 
but labor can go but a very little way towards 
making these available for the satisfaction of human 
wants, without the aid of implements and contri- 
vances which are produced by labor ; and which, 
being retained as an aid to future labor, are capital. 
Since it requires tools to make tools, the progress of 



174 ELEMENTS OF POLITICAL ECONOMY. 

capital at first was very slow ; but, since every ad- 
vance in mechanical contrivance makes still further 
advances easier, there is a natural tendency, which 
facts abundantly exemplify, to a more and more 
rapid progression in the number and perfection of 
all implements of production. The same motive 
that impelled to the first invention, has impelled to 
the whole series of inventions since, and will con- 
stantly impel to further inventions till the end of 
time. This motive, — and there is no motive that 
actuates man more universal, — is, to lessen the 
onerous effort of human muscle, and to throw upon the 
ever-willing shoulders of Nature more and more of the 
burden of production. Every step of this progress 
gives birth to a larger and larger proportion of satis- 
factions relatively to efforts ; marks an increasing 
control on the part of man over the powers of 
Nature; and gives promise for the time to come of 
greater advantages still in both these two directions. 
And it is because capital brings gratuitous natural 
forces into service, and the more so as capital pro- 
gi'esses, that the value of those things created by the 
aid of capital tends constantly to decline as com- 
pared with the value of those things, in whose pro- 
duction capital less conspires ; and in the chapter 
following the next will be developed from this point 
one or two important laws of value. 

The power of capital in reproduction is something 
marvelous. Capital breeds capital. Even the ordi- 
nary annual interest of money, if regularly com- 
pounded with the principal, will double that princi- 
pal in a very few years. But the rate of interest, 
which is usually reckoned by the year, must not be 



ON CAPITAL. 175 

confounded with the rate of profit, which may accrue 
by the day, by the week, by the month, or shorter 
irregular periods. Some interesting facts are men- 
tioned as occurring in the retail provision trade of 
Paris. Turgot instances that, in his time, the money 
lenders charged the petty dealers two sous a week 
for the loan of three francs. That is interest at the 
rate of 173 per cent, per annum. But if the dealer 
sold his three francs' worth of victuals for three francs 
and a half every day, as is likely, his profit, omitting 
Sundays, would be at the rate of 5,216 per cent. 
per annum. That this way of doing business is still 
kept up in Paris, as it used to be also in London, 
appears from a speech of a member of the late 
Legislative Assembly of France, who says, that a 
five-franc piece borrowed in the morning will buy 
provisions that may be sold for eight francs in the 
course of the day ; twenty-five centimes are paid in 
the evening without complaint as the interest on the 
money; that is at the rate of 1,800 per cent, per 
annum; but the rate of profit is 21,600 per cent. 
•per annum, or twelve times the rate of interest.^ 
Even at a very small ratio of profit to principal on 
each transaction, a money capital turned quickly 
over accumulates with a startling, almost incredible 
rapidity. Equally wonderful is the power of capi- 
tal in the form of machinery to hasten, facilitate, and 
accumulate production. 

Now, then, having seen what capital is, and the 
human motive that brings it forward in production, 
we next inquire after its remuneration. The remu- 
neration of capital is technically called profits : just 

1 See Macleod's Economical Plnlosoj)liy, p. 219. 



176 ELEMENTS OF POLITICAL ECONOMY. 

as wages are technically the remuneration of labor. 
The present proposition is, that profits are the legiti- 
mate reward of a service, just as much, and in the 
same sense, as wages are the legitimate reward of a 
Bervice. The distinctive service of the capitalist as 
such, as distinguished from the service of the laborer, 
consists in his voluntary abstinence from the use and 
enjoyment of that which he contributes in aid of 
further production. If a man puts a thousand dol- 
lars, which he might spend upon his immediate 
gratifications, into a machine to be used in his busi- 
ness, the money immediately becomes capital; the 
owner practices abstinence, and for this abstinence 
justly expects a reward. This reward we call profit. 
The expected profit is the only motive for the absti- 
nence. He will not be content simply to get his 
thousand dollars back, for that he has now: he must 
have his thousand dollars with a profit. Suppose A 
to be a manufacturer of flax fabrics, B to be a farmer 
in his neighborhood, and C an expert mechanic ac- 
quainted with the current modes of spinning and 
weaving flax. A has a capital of $10,000 invested 
in his business, in buildings, machinery, materials, 
and wages-fund, which nets him $1000 a-year clear 
profit. At the end of the year, the question with 
him is, whether he shall spend this $1000 unproduc- 
tively in immediate gratifications, or, adding it to 
his capital stock, increase his business with it. If 
he concludes to do the latter, he must forego the use 
and enjoyment of his $1000 for the present, he must 
practise abstinence ; and this he will not do, and 
ought not to do, except in view of increased profits 
to accrue from his business at the end of the next 



ON CAPITAL. 177 

year. If more flax is to be spun and woven in his 
factory, more money must be invested to buy more 
materials, to pay more laborers, or to pay for more 
or better machinery. His contribution to the pro- 
spectively increased production is ^1000, transformed 
by his intention from simple property to capital, 
devoted to production by a voluntary abstinence 
from its present use and enjoyment, in view of a 
future reward or profit. It is a service rendered by 
one man to a joint process to be performed by many, 
and gives him a just claim to a portion of the prod- 
uct. Is exertion irksome ? So is abstinence. Are 
wages legitimate ? So are profits. B as a farmer 
might devote all his fields to growing food and fruits 
for the gratification of himself and family, but since 
A now wants more flax fibre for his factory, he gives 
up a part of his acres to growing flax, and this be- 
comes a part of A's capital in the form of raw ma- 
terial ; and the money received for it may become 
capital in B's hands by being spent either in agricul- 
tural improvements, or in buying additional land. 
The mechanic C, by giving time, exertion, and 
money to the work, may invent an improved ma- 
chine for spinning flax, to be introduced into A's 
factory. The machine becomes a part of A's capital, 
and the money paid to C for his machine is partly 
wages, a reward for the labor bestowed on its con- 
struction, and partly profits, to replace to C the 
money used in making the machine, together with a 
reward for his abstinence from the use of this money 
until the machine was sold. Thus we see that capi- 
tal, whether in the form of wages-fund, materials, or 
implements, is always the result of abstinence ; and 

12 



178 ELEMENTS OF POLITICAL ECONOMY. 

that whoever abstains from the present enjoyment of 
anything, in order that that something may contribute 
to a future production, renders an essential service ; 
and, consequently, that the reward of such absti- 
nence, or profit, is just as legitimate as are wages. 
This is very clearly seen in the common case in 
which one man loans capital to a second, to be used 
by that second in his own business. Brooks has a 
thousand dollars in hand which he is at liberty 
either to enjoy un productively, or to employ himself 
productively, with the assurance of a profit; but is 
willing to forego the use of it for a year in favor 
of Smith, who is anxious to enlarge his business. 
Brooks' abstinence is a clear service to Smith ; and 
at the end of the year, therefore. Smith not only 
refunds the thousand dollars borrowed, but also sun- 
dry other dollars besides as a specific reward for this 
specific service. If Smith keeps the money ten years 
or tw^enty, it is no more than just that he should pay 
this sum every year till the principal is refunded, 
because the service is every year repeated, the ab- 
stinence is still practised in his favor. Therefore, 
capital once acquired by abstinence, becomes, if the 
abstinence be continued, a legitimate source of per- 
petual revenue to the owner, as well as a perpetual 
source for the maintenance of laborers. Whoever 
transforms his property into capital, establishes there- 
by a permanent fund whence he may draw an in- 
come, and laborers support, in perpetuity; because 
the capital, though constantly disappearing in pro- 
duction, as constantly reappears in products, with 
profits added : a fact w^iich shows the folly of the 
popular opinion which regards more favorably the 



ON CAPITAL. 179 

man who spends his money freely and unproduc- 
tively, than the man who, turning his money into 
capital, building a mill, or making other permanent 
investments, creates by that means a fund in the 
community, out of which permanent wages and 
permanent profits can be paido The strength of the 
motives to abstinence in any country will depend 
largely upon the character of the government, and 
the organization of society there ; these motives 
being generally sti'ongest where liberty of action, 
equality of privileges, and security of property are 
the greatest. 

We turn now to the relations of capital to labor, 
and to that law of the distribution of the products 
between capitalists and laborers, which was promul- 
gated by Mr. Carey, and which justifies his claim to 
be regarded as an important contributor to the 
science of Political Economy. As I regard some of 
the positions of Mr. Carey as erroneous, and shall 
animadvert on them in that view, I wish at this 
point to bear testimony to his merit as the dis- 
coverer of the beautiful law of distribution, in the 
light of which the future condition of the laboring 
classes in all countries, if they are only true to 
themselves, seems hopeful and bright. Capitalists 
are interested in profits, and laborers are interested 
in wages ; is there, then, as is commonly supposed, 
a deep-seated antagonism between them ? None 
whatever. No profits can be realized unless labor 
be united with the capital, because it is labor alone 
that works up the raw materials, tends the ma- 
chinery, and disposes of the products. Capital not 
united to labor remains barren, giving birth to no 



180 ELEMENTS OF POLITICAL ECONOMY. 

profit, nay, itself commonly becoming less. At any 
rate, the idle mill and hoarded gold yield no profit. 
"Without the profit there will be no capital ; since 
no man will practise abstinence without the hope 
of a reward : but without the labor there will be no 
profit ; and therefore the very presence of capital in 
any community, constitutes of itself a demand for 
labor. The more of capital in any community, the 
greater the demand for laborers, since it is through 
laborers alone that the profits are realized. But the 
greater the demand for laborers, the greater the re- 
ward of labor ; and, therefore, laborers as such, are 
interested in nothing so much as in the increase of 
capital, and in the strength of those motives to ab- 
stinence, out of which capital springs. 

Capital must have laborers. Laborers desire re- 
munerative employment. It is the old case of values 
over again. Labor offers a service to capital, and 
capital offers a service to labor. They exchange to 
the mutual advantage of both, and one is as inde- 
pendent as the other. The workmen may hold up 
their heads. They offer an honorable service on 
which capital is absolutely dependent for its exist- 
ence. They offer a service as legitimate and as 
respectable, as that of the clergyman who preaches 
their sermons and baptizes their children, and are 
paid- on precisely the same principles. Let no em- 
ployer feel too much exalted towards his workmen. 
The money he renders them is no whit better than 
the work they render him. The exchange is honor- 
able, and the parties to it on the same level of ad- 
vantage. They are as necessary to him as he is 
necessary to them. As a capitalist he cannot exist 



ON CAPITAL. 181 

without them ; as laborers they cannot exist ■v\nthout 
him. He is one blade of the shears, they are the 
other blade, and it takes both blades to cut. It is 
absurd to ask which blade cuts most, because there 
is no cutting at all, unless both blades work together. 

More than this. Capital and labor are not only 
essential to each other, but also each is bettered by 
the prosperity of the other. If capital realizes a 
good round rate per cent., every capitalist is anxious 
to enlarge his business, whether as lender or active 
operator, and employ as much of his wealth as pos- 
sible, as capital. This process increases capital. If 
men constantly put their profits only back into their 
business, which, under a high rate per cent., they 
will be pretty sure to do, capital rapidly increases. 
But increase of capital is, in its very nature, an 
increased demand for laborers. An increased de- 
mand for laborers, other things being equal, infal- 
libly raises wages ; just as an increased demand for 
anything else raises its value. Therefore, laborers 
are directly interested in the prosperity of capital, 
because the prosperity of capital leads to its in- 
crease, and its increase leads to higher wages. As 
a matter of fact, high profits and high wages, so far 
from being incompatible, usually accompany each 
other. 

But is the capitalist equally interested in the pros- 
perity of laborers ? I think so. That he has to pay 
high wages is not necessarily a dead loss to him. 
This is no game of grab, in which what one gains 
another loses ; it is a case of joint production, in 
which two parties conspire, and in which whatever 
helps to enlarge the gross amount produced, helps to 



182 ELEMENTS OF POLITICAL ECONOMY. 

increase the share falling to each party. If then, as 
they undoubtedly do, high wages tend to make the 
workmen more intelligent, industrious, frugal, and 
inventive, they are not a loss to the capitalist, but a 
gain. Larger gross returns are thereby secured. 
Improved intelligence and skill of workmen affect 
production, just as improved machinery, secured by 
the aid of capital, affects it. Both alike enlarge the 
aggregate of products to be divided between capi- 
talist and laborer. Now, in the division of products 
thus rendered larger in amount, what hinders capital 
from getting a fair share ? When a firm is prosper- 
ous, are not all the partners benefited ? All that is 
produced is to be divided ; if more is produced, 
more is to be divided. Intelligent, industrious, skil- 
ful workmen, are best for production, are best for 
the capitalist, and therefore, high wages, which tend 
to make them so, and which are a consequence of 
their being so, are to be paid without grudging. 
When the matter is sifted to the bottom, it is seen 
that capital is as much interested in the prosperity 
of labor, as labor is interested in the prosperity of 
capital. All legitimate interests are in harmony. 

I am now prepared to prove that all increase of 
capital, while it redounds to the benefit of capital- 
ists, redounds in a still higher degree to the benefit 
of laborers. The demonstration is Mr. Carey's, and 
is the law of distribution above referred to. The 
proof is this. The rate per cent, of profits invaria- 
bly goes down as a country grows older and richer. 
This is a simple fact of history, which no one will 
dispute. It has been exemplified alike in ancient 
and in modern times, so that one is at a loss whence 



ON CAPITAL. 183 

to take the best examples, when all the examples are 
so good. In England, three centuries ago, the legal 
rate of interest was ten per cent., while now the 
average rate is barely four in that country, and 
lower still in Holland. During the first years of 
mining operations in California, from eight to fif- 
teen per cent, a month, with security of real estate, 
was paid for the use of money, which enormous 
rates have now declined to rates not much hisrher 
than those paid in the States along the Mississippi 
River, and in these also the rates are constantly 
approximating those current in the older Eastern 
States. It may be assumed, therefore, as an indis- 
putable fact, that, as capital increases, the rate per 
cent, for its use tends steadily to decline ; but, while 
less profit is received on every hundred, there are also 
more hundreds, and consequently, there is an abso- 
lute gain to capitalists as a class, and both an abso- 
lute and relative gain to the laborers. Let us take to 
figures. Let $100,000,000, while the rate of profit 
is six, and $500,000,000, when it has fallen to four, 
be expended in payment of simple wages. So far 
forth, the value of the products to be divided yearly, 
will be represented respectively by $106,000,000 and 
$520,000,000. In the first case, $6,000,000 is profits, 
and $100,000,000 is wages. In the second case, 
$20,000,000 is profits, and $500,000,000 is wages. 
Here is an absolute gain to capitalists. Profits have 
gone up from six to twenty millions, are more than 
three times as great as before. But wages have gone 
up both absolutely and relatively. They have risen 
from one hundred to five hundred millions, and are 
five times as great as before. Profits have risen in 



184 ELEMENTS OF POLITICAL ECONOMY. 

the ratio of one to three, but wages in the ratio of 
one to five. This arithmetical example is put for 
the sake of illustration, but the principle holds good 
in every case where the rate per cent, goes down 
in consequence of the increase of capital, and there- 
fore the advantages of ever enlarging capital are 
even greater to the laborers as a class than to the 
capitalists themselves. Most assuredly, if capital 
now takes less out of every hundred, more is left to 
labor. Profits and wages are reciprocally the leaV' 
ings of each other, since the aggregate products 
created by the joint agency of capital and labor are 
wholly to be divided between them. This demon- 
stration is extremely important; for it proves beyond 
a cavil, that the value of labor tends constantly to 
rise, not only as compared with the value of the 
material commodities which, by the aid of capital, 
it helps to create, a truth we have seen before, but 
also as compared with the value of the use of its 
co-partner capital itself; and therefore, that there is 
inwrought in the very nature of things a tendency 
towards equality of condition among men. God 
has ordered it so. Self-interest is indeed the main- 
spring of movement in the economic world ; but no 
man can labor intelligently and productively under 
its influence, without at the same time benefitting 
the masses of men. His very savings, productively 
employed, are the poor man's wealth. 

It only remains to speak of the forms which capi- 
tal assumes, and to divide these, in general, into 
circulating and fixed capital. Circulating capital 
comprises all those products, the returns for the sale 
or consumption of which are derived at once and 



OlSf CAPITAL. 185 

once for all. Such are generally (1) all raw materials ; 
(2) funds destined for wages; (3) completed products 
on hand for sale ; and (4) all commodities bought and 
held for the sake of resale. Fixed capital comprises 
all those forms of capital which jire purchased or held 
with a view of deriving an income from their use. 
Such are generally (1) all tools and machinery ; (2) all 
buildings used for productive purposes; (3) perma- 
nent improvements in land ; (4) all investments in 
aid of locomotion, such as railroads, canals, ships, 
and everything subsidiary to these ; (5) all products 
loaned or rented, or retained for that purpose ; and 
(6) the national money. " The test of fixed and cir- 
culating capital is the inquiry. Are returns secured 
by the retention, or by the transfer, of the particular 
product ? Tools in the hands of him who uses 
them are fi_xed, in the hands of him who manufac- 
tures them, circulating capital." ^ 

As civilization advances, and the aggregate of all 
forms of capital enlarges, there is a tendency towards 
a relative increase of fixed capital, as compared with 
circulating. This disproportion would become greater 
than it actually does become, were it not for the fact 
that almost all forms of fixed capital are subject to a 
rapid deterioration of value, due partly to usual wear 
and tear, and partly to the progress of improvements, 
in consequence of which, what is old soon becomes 
antiquated. In nothing, perhaps, is actual cost of 
production so useless a guide to present value, as in 
machinery, and other forms of fixed capital. New 
and easier methods are being constantly invented, 
and the result of their introduction is to lessen the 

1 Bascom's Political Economy, p. 71. 



186 ELEMENTS OF POLITICAL ECONOMY. 

value of the old apparatus, and consequently to 
lessen the value of the aggregate accumulations of 
fixed, as compared with the current value of circu- 
lating, capital. Production looks perpetually to 
ends ; and estimates means just in proportion to 
their present efficiency to reach the end proposed. 
If the end can be reached by a cheaper process, in 
any department, the value of the former means will 
fall ; and the value of the former results secured by 
these means, other things being equal, will fall also. 
It has been estimated, that at the present time, the 
proportion of circulating capital to fixed in France, 
is one to eight; in England, one to three; in the 
United States, three to five ; proportions which are 
believed to be much higher in favor of fixed capital 
than formerly obtained in those countries.^ It is 
also worthy of notice that a too rapid and general 
conversion of circulating into fixed capital may 
prove temporarily injurious to large classes of per- 
sons. If all carriage-makers, for example, instead 
of selling their carriages outright, and making new 
carriages with the proceeds, should let them out on 
hire, receiving their value only in instalments, it is 
evident that they could not make so many carriages 
as before, and that their workmen would suffer by 
the change of method. So too, if, while a national 
debt is being contracted for war expenditure, general 
business become dull, and capitalists, preferring the 
steady income from the national bonds to the uncer- 
tain gains of business, largely invest their circulating 
capital in bonds, it is very clear that many laborert 
would suffer a disadvantage. In the same view, a 

1 Carey's Social Science, iii. 5G. 



ON CAPITAL. 187 

mania for iDuilding railroads, or any other impulse, 
by which large masses of floating capital are sud- 
denly transformed into fixed capital, will surely be 
followed by some temporary distress. 

It follows from all that has preceded, that a valne 
must first come into being, and be contemplated as 
existing, before it can possibly become capital, be- 
cause it is a distinct purpose of the owner to use it 
for a profit that capitalizes it, that is, transforms it 
from a mere value into the special form of Value — 
Capital. It also follows from what has preceded, 
that the vast destructions of war are mainly a de- 
struction of capital. War cannot be carried on ex- 
cept by means of property actually existing, nor for 
any length of time or to any great extent except by 
means of property existing in the form of capital. 
These savings previously employed productively are 
the source whence war-supplies are drawn ; the cap- 
ital is absolutely destroyed; the war-debt remaining 
is only a memorial of this destruction, and an obli- 
gation resting upon somebody to create new capital 
with which to replace the old ; the debt does not 
carry on the war, but transfers the capital from indi- 
viduals to the government; and war, accordingly, is 
the greatest enemy to exchanges, because it annihi- 
lates a portion of the central agencies which carry 
them forward. 



188 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTEE VIIL 

ON LAND. 

The test of a definition, a generalization, a the- 
ory, is found in those seemingly anomalous cases 
with which all science has to do, and which come 
with such apparent reluctance under her pains- 
taking classifications. If a definition given, or a 
generalization propounded, reduce into order these 
outlying cases without violence, as well as cover 
easily the more central phenomena, there is at once 
created a strong presumption of their truth. Does 
it cover all the cases ? Does it account for all the 
observed facts ? These are tests of definitions and 
of principles. The questions relating to the value of 
land and of its products have been among the most 
vexed questions of Political Econom.y, have exer- 
cised a vast amount of ingenuity, have led to careful 
and commendable observations and investigations 
in the whole field of agriculture, while the diverging 
views that have been taken, the arguments adduced, 
the "conclusions drawn, and the spirit manifested, 
in these discussions, form the most unrefreshing 
portion of the history of the science. These ques- 
tions, however bitterly debated in the past, are 
approaching, even if they have not already reached, 
a satisfactory solution. The value of land and of 
the products of land have been almost uniformly 



ON LAND. 189 

regarded in the theories of wealth as anomalous 
matters, to which peculiar principles are applicable, 
and from which certain conclusions are dedacible, 
which color and modify results and prospects in the 
whole field of value. Adam Smith, Ricardo, Mc- 
Culloch, Senior, and Mill hold substantially one set 
of views on land and its rent. Carey and Bastiat 
hold views on that subject almost totally at variance 
with the English writers ; it seems to me that the 
means are at hand for combining what is true in 
these opposing views in a clear and consistent man- 
ner, and for settling the dispute. I feel sure that 
both parties are right in many respects, and are 
wrong in some respects, and am not without some 
hopes of being able in this chapter to reconcile the 
difference, and to show that the value of land and 
the rent of land are not anomalous cases of value, 
but arise from human services rendered and ex- 
changed, just as all other value arises, and vary 
under the same laws as vary ail other values. 

Desires first, and then efforts — the utility to each 
party of the respective services, and then the equiv- 
alents rendered by each — these are the elements out 
of which the value of land and of its products, as of 
everything else, must spring; otherwise, our science 
lacks the generality which alone can constitute it a 
science. Whatever makes land more an object of 
desire than it was before, whether increased fertility 
or a location now become more advantageous, will, 
so far forth, increase its value ; and whatever makes 
the equivalent offered for it more an object of desire 
to the holder of the land, will, so far forth, dimin- 
ish its value; while the reversed conditions in each 



190 ELEMENTS OF POLITICAL ECONOMY. 

case will give of course reversed results. Let us see 
whether the definitions and principles already famil- 
iar to us will not apply perfectly to the value and 
rent of land. 

A series of propositions, and discussions under 
them, will bring out what seems to be the truth in 
this whole matter. 

1st. The whole earth with all its productive powers 
was given to men gratuitously of God under the sim- 
ple direction that they replenish and subdue it. 

No provision was made for particular ownership. 
The whole earth, thus bestowed without partiality 
upon a whole race, had in all its spontaneous prod- 
ucts a great utility, but, for a time, no value what- 
ever. The spontaneous fruits, when gathered by 
any person, might become thereby possessed of value 
from his effort expended, but to the land itself, on 
which no human efforts had been expended, the 
idea of value could not have attached. No man 
would have thought to say to another under such 
circumstances, This field is mine : give me some- 
thing for it, and you shall have it ; and if he had, 
that other would not give it, because such fields 
were open on every hand to his occupation gratis. 
It is not in human nature to render anything for 
something which may be gratuitously obtained ; 
value has no place in a sphere where everything is 
free. But it is well worth while to notice, that under 
God's command, the earth was not only to be re- 
plenished but subdued. Under this word subdue, 
and under the work implied in that, came in the first 
idea of ownership in land. When a family com- 
menced this work of subjugation upon a piece of 



ON LAND. 191 

land, when they enclosed it, settled on it, tilled it, 
in any way whatever improved it by an expenditure 
of their own toil, then first dawned upon their minds 
the idea of possession, then first began the land to 
be possessed of value, since now the family would 
justly say to another, If you want this field, you 
must give us an equivalent for what we have ex- 
pended on it. If the transfer took place, is it not 
very plain that what was sold, was not so much the 
inherent qualities of the soil as the result of the 
efforts expended in its amelioration ? The qualities 
of the soil lay indeed at the foundation of the utility 
of the parcel ; that utility, however, had been in- 
creased by the efforts of men ; and the value of the 
parcel, the equivalent rendered in return for it, would 
be gauged, in general; by this second factor in the 
utility. The first family received the soil and its 
powers gratuitously, and then expended a series of 
efforts on its improvement; but a similar series 
of efforts bestowed on other gratuitous land in the 
neighborhood would make it as eligible as this 
now is ; if, therefore, the family insisted on more 
than an equivalent for their exertions actually be- 
stowed on the land, the other would reply. For 
as much labor as you have given to your land, we 
can make other free land as good as yours, con- 
sequently we can give you no more than a fair equi- 
valent for your efforts. The value therefore of the 
parcel sold, would be determined, not by the gratu- 
itous elements involved, but by the onerous elements 
involved, that is to say, by the efforts already made 
by the first family in connection with the land, as 
compared with the efforts of the second involved in 



192 ELEMENTS OF POLITICAL ECONOMY. 

the remuneration offered. It is not possible in the 
nature of things that God's bounty to the whole race 
should be thwarted by any number of individuals 
through exclusive appropriation on their part of this 
bounty. What they received gratuitously, they 
must gratuitously transmit; what they have wrought 
of permanent improvements on the land, they may 
justly demand a recompense for, and can secure it. 
By their expenditure of efforts they have saved to the 
purchaser a like expenditure of efforts, and for these 
they can demand, and he will be willing to concede, 
a recompense; but if they go further, and demand 
pay for the natural qualities of the soil which God 
gave and they have not improved, for the sun that 
shines, and the rain that falls on it, the demand is 
blocked at once by the common sense of the pur- 
chaser. He replies : There is land enough in its 
natural state, with inherent qualities as good as 
yours, the same sun shining on it, and just as much 
blessed rain falling on it, which I can have for noth- 
ing. I cannot give you something for that which 
costs you nothing, and which I can get for nothing. 
As long as there is abundance of land still open 
to occupation, everybody will concede that this line 
of argument is just, and that the general value of 
land cannot rise above the estimated measure of the 
human efforts actually bestowed on its improvement. 
Though less obvious at first, the principle still holds 
true after all the land has been taken up. Improved 
farms are always for sale in every country, lands 
once appropriated and ameliorated are perpetually 
changing hands, and some men are always found 
willing to part with land, as with anything else, for 



ON LAND. 193 

what it has cost them. If some proprietors try to 
exact a price for their land made up of compensa- 
tion for what they and their predecessors have done 
upon it, and for what they or others have done in 
some proximity to or connection with it, together 
with something added for what God has done for it, 
their cupidity is usually thwarted by the readiness of 
others to dispose of their land for a fair equivalent 
of their own or others' onerous exertions. Human 
motives are such, and everything is so providentially 
arranged, that men cannot, as a rule, sell God's 
gifts ; it would be derogatory to the Giver, if they 
could. 

Lands in cities, or in the neighborhood of them; 
lands of unusual fertility, or possessing superior 
building sites ; lands containing rich mines or a re- 
markable water-power; sometimes excite extraor- 
dinary desires to possess them, and bear in conse- 
quence an extraordinary price. Still the efforts, 
care, and abstinence of their owners, or of others, 
have made up an essential part of their present 
utility. They are assimilated in the law of their 
value to other unique products. Of such lands no 
market rate can be predicated, because competition 
has no play. Their utility, like every other utility 
that underlies value, is partly the contribution of 
nature and partly the contribution of man, but com- 
petition in this case has not its usual opportunity to 
eliminate from its action on price that portion of 
the utility that is the free gift of nature. Their 
price, consequently, is only gauged by the service 
which the owner can render the purchaser by them. 
With these unimportant exceptions, which them- 

13 



194 ELEMENTS OF POLITICAL ECONOMY. 

selves come with precision under our fundamental 
principles, the value of land follows the law of other 
values, arises only in connection with human efforts, 
is open to free competition, is not affected by the 
utility that comes from nature, rests back upon the 
right of making efforts for one's own welfare, and 
of not parting with the result except for an equiv- 
alent, is a clear case of service for service, and varies 
like other values under the law of demand and sup- 
ply- 

What might be thus inferred from the nature of 

the case, is abundantly confirmed by facts. As a 
matter of fact and experience, lands are absolutely 
valueless until some portion of human effort has 
been expended on them, or in reference to them. 
They may have utility, but they have no value. 
Nobody will give anything for them. The United 
States government has been selling for years some 
of the best lands in the world for one dollar and a 
quarter an acre, and this after the lands have been 
surveyed at government expense, local governments 
provided for the settlers, and mail facilities and other 
privileges guaranteed to them. The same govern- 
ment is now giving away similar lands in home- 
steads to actual settlers, merely taking for the title- 
deeds nominal fees, whose aggregate amount does 
not begin to meet the expenses incurred in connec- 
tion with these lands. If lands had value, indepen- 
dent of human exertions, then would the English 
companies and individuals who received grants in 
the seventeenth century of vast tracts of as fertile 
land on this continent as the sun ever visited in his 
diurnal revolutions, have become rich as Crcesus ; 



ON LAND. 195 

but these companies and individuals did not become 
rich at all, but rather poor. The amount realized 
from the sale of their lands fell far short of reimburs- 
ing the expenses of colonization; and, after incurring 
debts and endless vexations, most of the companies 
and proprietors were glad to be rid of their lands at 
any price. It is a current proverb now in regard to 
wild lands at the West, that the more a man has of 
them the worse off he is ; and it is a maxim also in 
the newer settlements everywhere, that improved 
lands are worth the present value of the improve- 
ments and no more. Mr. Carey is at pains to prove, 
what might be expected beforehand, that the value 
of lands in old countries is now less than they have 
cost of actual human efforts in their subjugation 
and improvement. The progress of capital and in- 
ventions enables similar work to be done now at 
greater advantage, and consequently the results of 
former work have fallen in value. While, therefore, 
value in land arises solely in connection with human 
efforts of some sort standing in some relation to 
that land, it is important to observe that the value 
is not always proportioned to those efforts. The 
efforts may have been misdirected ; the desires cal- 
culated upon may have taken another turn ; the 
utility sought to be conferred may not find the 
requisite natural utility underneath ; and so, there 
is a greater diversity in the value of lands than in 
the amount of efforts expended upon them. 

It is aliso worthy of remark that the element of 
profits frequently finds place in the price of lands. 
Land may be purchased and held a long time with 
a view to ultimate profits. Little may have been 



..196 ELEMENTS OF POLITICAL ECONOMY. 

done for the land originally, and little in the mean 
time, and yet the ultimate price be large, because 
the purchase-money should be replaced with com- 
pound interest. Abstinence, therefore, which is one 
form of effort, has often to do with the value of 
lands. Also, the efforts of certain men put forth 
exclusively towards ends of their own, as in locating 
a railroad or a manufactory, may benefit the lands 
of other men as much as efforts put forth with that 
direct intent. These lands become thereby more 
desirable and therefore more valuable. 

It is also worthy of mention, that lands do not rise 
in price under a depreciated currency so promptly, 
and probably not so much, as commodities do. This 
has been widely noted in this country of late. The 
reasons are, first, that lands, being more stable than 
commodities are, do not feel the same necessity of 
being constantly insured against still greater depre- 
ciation ; and, secondly, that as a depreciated cur- 
rency makes against agricultural products, so far as 
any part of them is exported, lands tend to diminish 
in value from this cause. 

2d. The powers of all land, under more laborious 
cidture, agricultural skill remaining the same, are sub- 
ject to the law of diminishing return; in other words^ 
increased labor upon it, though increasing the aggre- 
gate' return of produce, does not secure an increase 
proportioned to the increase of labor. 

I shall use the short term " produce " to denote ex- 
clusively what might be expressed by the longer term 
"agricultural product," although I am not sure that 
good English usage has made any distinction between 
" produce" and " product." I mean by it all the fruits 



ON LAND. 197 

of the earth cultivated for the sake of their sale. 
The above is the fundamental proposition on which 
Ricardo, and the English writers generally, lay such 
stress, and on which they found the law of Rent, and 
the necessity of restraints on population ; while 
Carey and Bastiat, impliedly if not expressly, deny 
the proposition, and of course, the inferences deduced 
from it. In my judgment, the proposition cannot 
be logically denied. The law of diminishing return 
from land is a law of Nature, and has played a very 
important part in the occupation and culture of suc- 
cessive portions of the earth's surface. The proof 
of the proposition is all the better for being short. 
If by doubling the labor on a piece of land, double 
the produce could be secured, and by quadrupling it, 
quadruple, and so on, there would be no reason why 
any man should ever cultivate more than a square 
acre, or even a square rod. He has a strong motive 
to confine his culture to a small space, just so long 
as the amount of produce is in the ratio of the labor 
expended, because there is less locomotion of tools 
and fertilizers and crops. The fact that he extends 
his culture from one acre to another, and then to 
distant acres, notwithstanding the inconveniences 
and expense of transportation, is an irrefragable 
proof of the proposition in question. Increase of 
agricultural labor and expenditure on a given space 
of land will secure a larger amount of produce, but 
as a general law, the increased amount will not be 
proportioned to the increased expenditure. If it 
were thus proportioned, if the law of diminishing 
return did not exist, then, for purposes of agricul- 
tural production, a square acre is as good as a con- 
tinent. 



198 ELEMENTS OF POLITICAL ECONOMY. 

It is through this law of diminishing return, that 
the Creator has secured the gradual occupation by 
men of almost the whole earth. There is a strong 
tendency to leave the old acres to advance upon 
new, the old countries to emigrate to new, when- 
ever the returns begin to bear a more unfavorable 
ratio to the labor bestowed. The farmer will ad- 
vance from the first to the second acre as soon as 
he thinks that more produce can be obtained from it 
by a given amount of labor than can be got by a 
like expenditure of additional labor upon the first 
acre, allowance being made for the increased incon- 
venience ; and so, cultivation has gradually extended 
itself, and men have become dispersed over the whole 
earth. Other principles leading to dispersion have 
undoubtedly cooperated, but this is the fundamental 
one, operative at all times, changing the course of 
population, and consequently of empire. 

Mr. Carey seems to think that this proposition is 
dependent on another, and endeavors to break down 
this by an attempt to break down that other. That 
other proposition is, that in the course of occupation 
the best lands are entered upon first, and that after- 
wards recourse is had to the poorer soils. He at- 
tempts to prove that the exact reverse of this is the 
historical fact, that cultivation has always been 
begun upon the poorer soils, and that afterwards 
the river bottoms and strong lands have been drained 
and cleared and tilled. This discussion, however 
interesting in itself, is irrelevant as far as the law of 
diminishing returns is concerned, because that law 
is nowise dependent on the order in which soils of 
different productive power are entered upon in cul- 



ON LAND. 199 

tivation; it is true of all soils, whether rich or poor, 
whether entered upon in the order of their fertility, 
or in the inverse order ; and I cannot help thinking 
that Mr. Carey puts upon this matter of the order 
of occupation, which he asserts has always been 
from the poorer to the richer soils, an estimation 
altogether disproportioned to its importance. "When- 
ever men have entered upon new countries, they 
have undoubtedly selected those lands first which 
seemed to them most eligible, reference being had 
of course to their present means of subduing them ; 
and whether these lands proved ultimately to be 
better or worse than other parcels which they might 
have chosen, is a point, which, however determined, 
has no effect to disturb the fundamental proposition 
in hand. 

3d. The operation of the law of diminishing' returns 
is retarded by all improvements in agriculture. 

The discovery of new and more available fertil- 
izers, the invention of better agricultural implements, 
the light thrown by chemistry upon agriculture, the 
consequent adoption of better methods of culture 
and rotation of crops, the more perfect adaptation 
to the various soils of the kinds of produce sought 
to be raised from them, all these and similar im- 
provements tend to increase the ratio of the produce 
to the labor, and disguise the law just established. 
The lands that are now under cultivation may be 
made, under more skilful modes of culture, to yield 
indefinitely more than at present, and the vast still 
uncultivated lands of the world may come to render 
an incalculable quantity of food to the world's pop- 
ulation ; but yet, as improvements are naturally 



200 ELEMENTS OF POLITICAL ECONOMY. 

less continuous in this than in some other depart- 
ments of production, as invention has less play, as 
there is less opportunity for the division and cooper- 
ation of labor, as nothing can materially shorten the 
time during which the fruits of the earth must ripen, 
it is certain that possible improvements virill never 
override the law of diminishing returns ; and, conse- 
quently, that the value of agricultural products tends 
to rise relatively to manufactured products generally. 
Labor, for a reason already given, and produce, for 
the reasons now given, have risen and tend steadily 
to rise, as estimated in general commodities. 

4^A. The rent of land is the measure of the service 
which the owner renders to the actual cultivator^ and 
does not differ essentially in its nature from the rent 
of buildings in cities, or from the interest of money. 

Mr. Ricardo's famous doctrine of rent, is for sub- 
stance, this : there are some lands in every country 
whose produce just repays the expenses of cultiva- 
tion, and consequently yields no margin for rent ; 
and the cost of production on these rentless and 
poorest lands under cultivation, will determine the 
price of the produce ; and as there can be but one 
price in the same market, the produce raised on more 
fertile lands will be sold for the same price, and this 
price, besides paying the cost of production, will 
yield" a rent rising higher according as the land is 
more fertile ; so that the rent paid on any land is 
always a measure of the excess of productiveness 
of that land over the least productive land under 
paying cultivation ; and therefore, an increased de- 
mand for food in consequence of increased popu- 
lation, and the higher price resulting, will force 



ON LAND. 201 

cultivation down upon still poorer soils, or else 
compel a higher culture for less remunerative returns 
on the old soils, according to the law of diminishing 
returns, which in either case will raise the rents on 
all the soils above that grade that just repays the 
expenses of cultivation; so that it is the sole interest 
of landlords, as such, that population should be dense 
and food high, their interest being directly antago- 
nistic to that of the other classes of the community. 

This very ingenious and complicated theory, which 
is supported by many other authoritative names be- 
sides that of its author, is too mechanical and rigid 
to be a good scientific statement of universal facts. 
It is true that, if 150 bushels of wheat are raised 
each with x hours' labor, and 50 each with x -\- y 
hours' labor, and 200 are wanted, the price of the 
whole, offered at once, will not be below the rate 
X -\- y for the whole 200 ; but this fact is not suffi- 
cient to make the price of food and the rent of lands 
anomalous cases of value, and it never would have 
been supposed so, had not England been under infa- 
mous corn laws which forbade importations, and 
made everybody tributary to landlords. If a war 
breaks out, and the founders have only 150 cannon 
on hand, which cost x, and the order comes for 200 
to be delivered at once, of which fifty will cost x -\- y; 
the founders will as certainly be paid for the whole 
200 at the rate x -\- y. When the trade in corn is 
free, the Ricardo law of rent loses its formidableness, 
and the simple law remains, applicable to all prod- 
ucts that have a market-rate, that that rate must be 
sufficient to compensate the cost of that portion pro- 
duced with greatest difficulty, otherwise that portion 



202 ELEMENTS OF POLITICAL ECONOMY. 

would not be produced. Of course, those who pro- 
duce at the greatest advantage will realize extra 
gains from this market-rate, so far forth as their ad- 
vantage does not depress the market-rate. So far as 
lands are taken on shares, or on permanent leases, 
or so far as their products are exchanged directly 
against other commodities and services, the law of 
Ricardo has little application. As a matter of fact, 
too, there is sometimes more than one price of sim- 
ilar products in the same market-town, although 
there is a strong tendency towards one price of sim- 
ilar goods of the same grade ; and prices, especially 
prices of produce, are varying all the while from 
other causes than those affecting the cost of produc- 
tion. The following seems to me to be the whole 
truth in regard to rent. That portion of utility in 
lands that is the free gift of Nature is mostly a com- 
mon factor eliminated from value by the action of 
competition, as in the horses and strawberries, by 
which illustration was made in the chapter on Value. 
When not thus eliminated, that part of the utility 
may raise the rent as well as the price, but the ex- 
ception in either case is practically unimportant, in 
both cases is amenable to the law of services ex- 
changed, and, the exception aside, the rent of lands 
is a simple recompense for the use of a productive 
instrument, made such by human efforts. The 
owner has become proprietor of all the results of the 
onerous exertions put forth upon that land, or in any 
connection with that land, and allows the lessee the 
use of these results. Because the owner practises 
abstinence in the lessee's behalf, rent is substantially 
the same dis profits; and as gross profits include the 



ON LAND. 203 

wages of superintendence, so rent also partakes of 
the nature of wages, so far forth as the owner still 
takes an active supervision of his property. Prox- 
imity to markets, degree of fertility, state of improve- 
ments, and the variations of supply and demand, 
will influence rent. 

bth. That division of land is best for purposes of 
production, ivhich gives farms approodmately equal in 
size to the cultivators ; and the best tenure is the fee- 
simple. 

Taking the last part of the proposition first, the 
fee-simple is better for production than any other 
tenure, because when one owns the land he tills, he 
takes a greater interest in it, it is his own, he has a 
constant motive to improve it, to make the produc- 
tion from it as great as possible, since all it pro- 
duces is his own. If men work from motives, and 
if the energy and persistence of the work be propor- 
tioned to the constancy and press of the motives, 
then will the fee-simple most certainly make the 
aggregate of produce greater than any other tenure 
of land. Moreover the fee-simple immeasurably 
improves the character of the cultivators. The 
masses of men are educated and developed by 
nothing so much as by the ownership of land. It 
tends to make them industrious, thrifty, indepen- 
dent, hopeful of the future, anxious to give their 
children better privileges, as well as better lands, 
than they themselves had. The testimony on this 
point is abundant from many countries, and it all 
goes to show that the peasant proprietor is a hap- 
pier and more virtuous, as well as a more industri- 
ous and productive man, than the mere tenant and 



204 ELEMENTS OF POLITICAL ECONOMY. 

farm-laborer; while similar testimony, as well as 
common observation, proves, that lands under the 
copyhold tenure, or leased at will, are far infe- 
rior in point of improvements and production, to 
contiguous lands held in fee-simple. The zeal of 
absolute ownership, especially if it be a limited 
ownership, has been observed to produce almost 
magical effects, as well upon character as upon 
lands, transforming after a while the poorest into 
excellent lands, and thriftless and desponding labor- 
ers into frugal and enterprising proprietors. 

The practical play of the fee-simple draws after 
it such a division of lands into farms moderately 
large and approximately equal, as can be shown to 
be most favorable to the largest aggregate produc- 
tion. Wherever there is no primogeniture and no 
entails, and owners can consequently sell a part or 
all their lands, whenever it is their interest to do so, 
lands naturally fall into those hands which are most 
capable of using them productively, because such 
persons can afford to pay more for them than any- 
body else; and the division that follows this impulse 
of self-interest and this freedom of exchange is 
likely to be into farms tolerably equal in extent and 
moderately large. Such a division has naturally 
taken place in New England, in the Middle States, 
and at the West ; while in the South, the institution 
of slavery led to the system of large plantations 
and few land-owners, which system, I believe, will 
now, under the auspices of freedom, give way to the 
better system of small farms and numerous proprie- 
tors. That the latter system is more profitable in 
reference to production, as well as advantageous in 



ON LAND. 205 

point of national character and a broadly based and 
sound development of the national resources, is evi- 
dent from a few considerations, and has been exem- 
plified distinctly in the diverse experience in this 
respect of France and England. 1. When the 
mass of the agricultural population are owners of 
.the soil they till, the motives to productive culti- 
vation are brought to bear most universally. These 
motives are interest and hope. There is a high 
pleasure in possession, and in self-guided exertion, 
a strong stimulus to get as much as possible from 
the land, and at the same time to keep good and 
ever improve its condition. When the great body 
of the land of any country comes under the action 
of such motives as these, then will the amount of 
production be the greatest. 2. Aristotle quotes from 
" the African " the saying that the best manure for 
the land is the foot of the owner ; a saying which 
is often attributed to Dr. Franklin, and which is as 
true as if its origin did not date back some centuries 
before Christ. Franklin had read Aristotle. Personal 
supervision, to be most effective, must be limited in 
its sphere ; and the best agricultural knowledge and 
skill becomes comparatively weak when it attempts 
to exhibit itself on too broad a surface. Because a 
man can cultivate one hundred acres better than any 
of his neighbors, it does not prove that he will cul- 
tivate fifty acres additional to them better than a 
neighbor of inferior skill, who is the owner of those 
fifty and no more. 3. The possession of small free- 
holds educates and gives energy to the masses. 
That educates a man which calls forth varied efforts 
of intelligence and will. To protect and advance 



203 ELEMENTS OF POLITICAL ECONOMY. 

his own interests, to attend upon the seasons, to 
watch and wait, to foresee and plan and labor, all 
this will secure that a nation of freeholders will 
never be a nation of ignorant, indolent barbarians. 
4. National strength is best secured and main- 
tained wherever there is a broad basis of indepen- 
dent yeomanry to lean back upon when heavy taxes, 
are to be raised and strong blows of battle are to be 
struck in behalf of the nation. 

France and England are instructive examples in 
this whole matter. In France, since the abolition 
of all entails and primogenital rights by the revolu- 
tion of 1789, and under the action of the law requir- 
ing the equal partition of a man's landed estate 
among his children, the lands have become subdi- 
vided into small parcels, averaging about fourteen 
acres to each owner. Out of a population of 
37,500,000, 8,897,000, or nearly one fourth, are pro- 
prietors of land either in town or country. Of im- 
proved and unimproved lands there are in France 
about 122,500,000 acres owned by individuals. The 
number of different lots of land, however, is about 
140.000,000, or considerably less than an acre, on the 
average, to each lot. About ten of these lots, on 
the average, are included in one assessment of the 
land-tax ; the whole number of such assessments 
being 14,123,117. Of these fourteen million as- 
sessed properties, more than seven million are worth 
less than $1,000; more than two million are worth 
between $1,000 and $2,000; nearly two million 
more are worth less than $3,000; while only 53,000 
properties are worth more than $100,000. The esti- 
mated value of all these lands is $31,000,000,000 ; 



ON LAKD. 207 

and the annual net income $937,500,000. These 
figures, which are all taken from the official returns 
of the French government for the year 1866, are very 
significant of the beneficial results of the land sys- 
tem of France. In point of a regular increase of 
agricultural products; in point of an industrious, 
frugal, cheerful peasantry ; in point of a very general 
desire and ability to purchase land; in point of 
showing that subdivision ceases so soon as the lands, 
if divided further, would be less profitable in produc- 
tion ; in point of pauperism ; in point of national 
strength and weight, in spite of a centralized and 
repressive government; in point of an ability in the 
peasantry to loan to government, in an exigency, 
large sums of money in the aggregate ; a long expe- 
rience has shown that the practical workings of this 
division have been most happy. 

In England, on the other hand, the monster-farm 
system prevails, the small proprietors have mostly dis- 
appeared, the law of entails and leases ties up the 
landed estates from sale and division, less than 150 
persons own one half of all the lands in England; 
and not more than ten or twelve persons are in pos- 
session of one half of all the land in Scotland. The 
national results of this system are what we should 
expect they would be. There are upper and middle, 
and lower and lowest classes, but a homogeneous 
English people are not to be found. Particular re- 
sults are seen, in part, in what has been justly called 
the irretrievable helotism of the laboring classes; in 
an average of 1,169,043 persons in the three king- 
doms relieved by means of the poor-rate on a speci- 
fied day during twenty-three years, from 1849 to 1871 



208 ELEMENTS OF POLITICAL ECONOMY. 

both inclusive, of whom on the average 207,890 were 
able-bodied adults ; in an annual poor-rate raised 
by taxation of $53,187,225 during the twenty-three 
years on an average, some of which, however, was 
expended for other purposes ; in unmeasured ine- 
quality in fortunes and comforts; in the lack, felt 
alike in war and peace, of a large class of sturdy 
yeomanry, the strength of a state; and in a conse- 
quent sinking of relative position, power, and influ- 
ence, former times being held up with the present, 
as compared with France and the other first-class 
powers. No degree of merit in the other parts of 
the English system, can ever compensate the want 
of just and broadly liberal laws of land. Still, the 
merits of other parts of the system are alleviating 
results even here. Pauperism is declining. Wages 
are rising. The annual poor-rate, if not growing 
less, at least alleviated 592,500 less persons in 1871 
than in 1849, and 24,002 less of able-bodied adults, 
while the proportion of persons relieved to the whole 
population was in 1871 in the ratio of 1,081,926 to 
31,513,442, or one to 29, a proportion much less 
frightful to contemplate than those which prevailed 
previous to 1842. 

The " encumbered estates law," applicable only 
to Ireland, passed by Parliament in 1848, has had 
the beneficial effect of multiplying the number of 
landed proprietors in that island. Under this law 
there can be brought into market, in whole or in 
parts, estates encumbered with debt, and thus shut 
out from improvement. " The proceeds of the sale 
are paid into the Court of Chancery, to be distributed 
by that court as equity may require, between the 



ON LAND. 209 

owner, his creditors, the various encumbrancers, the 
heirs at law, and all other interested parties." ^ Thus 
millions of acres of heavily mortgaged lands have 
passed from the hands of their nominal owners into 
the hands of absolute proprietors, whose title is per- 
fect because parliamentary, and whose interest and 
zeal are said to have changed already the face of 
their lands. In the first five years of this system, 
more than one tenth of all the landed property in the 
island was sold in the Irish Encumbered Estates' 
Court ; and the land thus sold was divided into 
about five times as many distinct estates as before. 
Up to 1870, the value of the lands sold in this way 
amounted to $170,182,015. The proportion of pau- 
pers to the population was only one to 80 in 1867. 
Recent parliamentary legislation has relieved the 
Irish of their forced tribute to the English Church; 
and the hope may be indulged that Ireland has 
already entered upon a period of substantial improve- 
ment and prosperity. 

1 Bowen's Political Economy. 1st ed., page 521. 



210 ELEMENTS OF POLITICAL EGONOiMV. 



CHAPTER IX. 

ON COST OF PRODUCTION. 

We are now in position to be able to analyze the 
cost of production, and to bring forward some sup- 
plementary matters relating to value, which could 
not be properly discussed, until the subjects of labor, 
capital, and land, were, at least in their ground prin- 
ciples, understood. While we were inquiring, in the 
chapter on value, whether such a thing as a measure 
of value were possible, it was remarked that some 
political economists have thought that the cost of 
production of any commodity is the most accurate 
measure of its general purchasing-power ; and it 
might have been added, that these writers consider 
that there is such a thing as natural value distinct 
from market value, that natural value is the cost of 
production, and that market value oscillates perpetu- 
ally around that, and tends constantly to return to it. 
How far these views are just, how far cost of pro- 
duction constitutes a law of value within the all- 
comprehending law of demand and supply, is the 
point to which attention is now directed. 

It is noticeable, that while almost all people put 
forth onerous efforts to satisfy the present and imme- 
diately prospective wants of other people, in view of 
receiving back from them corresponding efforts to 
satisfy their own present and immediately prospec- 



ON COST OF PEODUCTION-. 211 

tive wants, there are some people, who have both 
foresight and capital, who set to work to make 
preparations in reference to services which they ex- 
pect to render some time in the future; and it is 
evident that this matter of the cost of production 
has an especial bearing upon those classes of pro- 
duction in which permanent investments are made, 
looking to future rather than to present exchanges. 
It becomes necessary to attend to cost of production 
simply because cost of production is sometimes an 
exact measure of one of the elements out of which 
value springs, namely, the element of effort. When 
a surgeon, for example, charges fifty dollars for cut- 
ting off a man's leg, cost of production is an imper- 
tinent phrase in relation to such a service, and is no 
measure of the effort ; but when a capitalist invests 
$20,000 in a cutlery establishment, hires all his 
labor, and at the end of the year has produced 5000 
knives, cost of production has a definite meaning as 
applied to each one of the knives, and is an accu- 
rate measure of the one element of effort, which 
goes, together with other elements, to determine its 
value. It is not true at all that cost of production 
alone determines the value of the knife, or is a meas- 
ure of the value of the knife, but it is true that, in 
this case, and in all cases in which a commodity is 
produced by a definite capital invested for a fixed 
time, and by labor wholly hired, or estimated as 
hired, the cost of production is an exact measure of 
one of the four elements which go to determine 
value, namely, of one effort. Now let us suppose 
that when these knives are exposed for sale, no such 
return efforts are offered for them as are estimated 



212 ELEMENTS OF POLITICAL ECONOMY. 

by the maker as compensatory and remunerative. 
He may, in order to avoid a still greater loss, sell 
his knives below the cost of their production, but it 
is evident that he will not go forward at present in 
his enterprise of making knives. He will suspend 
operations, or withdraw from the business ; and his 
action in this respect will affect the supply of knives 
to lessen it ; and the next equalization of demand 
and supply will be likely to adjust a market value 
more favorable to knife-makers. Or if, when the 
knives are exposed for sale, they meet with an ex- 
change at very remunerative rates, our capitalist is 
now stimulated to increase his production, to put back 
his profits into his business, and perhaps to invest in 
it additional principal. His action in this respect will 
affect the supply of knives to increase it; and the 
next equalization of demand and supply, or if not 
the next, some subsequent one, will be likely to ad- 
just a new market value less favorable to knife- 
makers. Thus it is seen, that absolute cost of 
production influences value not directly, but re- 
motely, through its influence on supply. To sup- 
pose and to say that the cost of production of one 
commodity determines its value in an exchange with 
another, is to perpetuate the old mistake of ignoring 
the second commodity, is to reiterate the fallacy that 
value" is an independent quality of one thing, is to 
confuse the whole subject of value. When the 
writers referred to speak of the "natural value" 
of any commodity, they mean its absolute cost of 
production ; but, at this stage of our inquiry, it 
surely cannot be necessary to repeat the thought 
already so often expressed in substance, that an 



ON COST OF PRODUCTION. 213 

analysis of one component part falls far short of de- 
termining the resultant of four component parts. I 
do not think the expression " natural value " is cal- 
culated to be useful. From the very meaning of the 
word " value," if it is to have any consistent mean- 
ing at all, there can be no other kind of value than 
market value, that is, value in exchange. 

But while all this will doubtless be conceded to 
be just, there are other points of view in which the 
cost of production of any commodity comes to be a 
very important matter. From its obvious relations to 
supply, already exemplified, it is constantly, though 
indirectly, influencing the value of the commodity 
itself; and in respect to permanent investments, 
looking solely to future production, it becomes the 
main inquiry ; because, while the cost of production 
can never determine the purchasing-power of the 
product, it is always one element in determining it ; 
and also, especially, because the improvements which 
are all the time being introduced into the mechani- 
cal and other processes of such production, which 
improvements always tend to lessen the cost of the 
product, have the effect to lessen the value of all 
permanent investments, unless similar improvements 
be inaugurated in connection with them. The march 
of improvement is so constant, that old machinery 
and old processes are rapidly depreciated ; and a 
calculated cost of future production in one establish- 
ment is almost sure to be disturbed by new labor- 
saving inventions in other similar establishments, 
which will be able in consequence to offer the com- 
modity at a lower rate than the rate estimated ; 
in which case the value of the product will not con* 



214 ELEMENTS OF POLITICAL ECONOMY. 

form to the estimated or even actual cost of produc- 
tion in that establishment, but will pitilessly fall to 
the point at which similar commodities are offered 
by the more fortunate producers. For these reasons 
we must inquire carefully after the elements of cost 
of production. 

These elements are two : cost of labor, and cost 
of capital. These are the only onerous elements 
that enter into production. Assisting the processes 
are, indeed, the natural powers of land, water, wind, 
steam, electricity, and so on, but as these are always 
gratuitous, they form no element of cost. Labor 
must have its wages, and capital must have its 
profits, and also a sinking-fund from which to 
replace the original capital when worn out or ex- 
pended. It will be in vain to search for any other 
ingredient of cost than these two.^ 

1. By cost of labor is meant, of course, its cost 
to the employer, and not to the laborer himself, 
in reference to whom the phrase would have no 
definite meaning. Now, if we make an exhaustive 
analysis of the cost of labor to the employer, we 
shall find that there are three things, and only three 
things, that go to determine its cost. 1. Efficiency 
of the labor. 2. The rate of nominal wages paid. 
3. The cost of that in which the wages are paid. 
To illustrate each of these in order: — If a capitalist 
hires two men to work for him at the same rate of 
wages, and if the one is twice as efficient a laborer 
as the other, the cost of his labor to the capitalist is 
one half less than the cost of the other's labor. The 
first element of the cost of labor is its efficiency If 
a capitalist, accustomed to pay one dollar a day, is 
1 Compare J. S. Mill's Political Economy, book iij chap. 4- 



ON COST OF PRODUCTIOIf. 215 

now obliged to pay one dollar and a half a day to 
his laborers, their efficiency remaining the same, the 
cost of labor is increased in the ratio of 2 to 3. The 
second element is nominal wages. If that com- 
modity, whether money or other, in which wages 
are paid, varies in cost to the capitalist, the cost of 
the labor compensated by that commodity, nominal 
wages and efficiency remaining the same, is varied 
thereby of course. We shall discover in the next 
chapter that the value of money is by no means 
invariable, as we have already learned the variable 
nature of all other values, and accordingly the third 
element of cost of labor is the cost of that in which 
the labor is paid. It is easy to see that there is 
nothing else, aside from these three things, that can 
ever affect the cost of labor. This analysis is noi 
given here for its own sake merely, but for some 
ulterior purposes, of which the first is to show, how 
various are the ingredients that enter into the com- 
putation which men ought rationally to make before 
engaging in extended enterprises of production. 
They must make calculations on the prospective 
cost of production, since that is one element that 
will determine the value of their future product. In. 
doing this they must calculate the cost of labor, and 
the cost of capital ; and the cost of labor alone 
involves, as we have just seen, three variables, no 
one of which can be safely neglected in the sup- 
posed estimation. 

The second purpose is to explain from the analy- 
sis, that a great diversity of nominal wages may 
exist in different countries without necessarily affect- 
ing the cost of labor. If English wages, for exam- 



216 ELESIENTS OF POLITICAL ECONOMY. 

pie, are, nominally, one half wages in the United 
States, it is very poor logic to jump to the conclu- 
sion, that the cost of labor in England is one half 
less than in the United States. That will depend 
partly on the efficiency of the labor, and partly on 
the cost of that in which the respective labor is paid. 
If English laborers are only one half as efficient as 
American laborers, then a difference of one half in 
nominal wages, cost of money in the two countries 
being the same, will occasion no difference at all 
in cost of labor. Because nominal wages in Eng- 
land are lower than with us, many people think and 
maintain, that the English have an advantage over 
us, whereas it is notorious, and admitted even by 
themselves, that American labor is more efficient 
than English labor, and therefore there is no such 
difference in cost of labor as the difference in nom- 
inal wages would indicate, even if there be any 
difference in cost of labor at all. Just at this point 
great confusion has existed in the popular mind, and 
some by no means harmless fallacies are still current, 
arising from the want of a due analysis of the cost 
of labor. It is probable, all the elements being 
allowed for, that the cost of labor in one country is 
not very widely different from its cost in other coun- 
tries ; because, if there were much difference, there 
would be a greater difference than is actually ob- 
served in the rate per cent, of capital ; and this con- 
clusion is strengthened, when it is remembered, that 
in those countries in which the cost of labor is sup- 
posed to be low, as in England, the rate per cent, of 
capital is also low ; and in those countries, as the 
United States, in which the cost of labor is sup- 



ON COST OF PRODUCTION. 217 

posed to be high, the rate per cent, is also high. 
Before leaving this point, I wish to remove one or 
two causes of misapprehension, which have fre- 
quently infected discussions of wages. The terms 
" high and low wages," are often used ambiguously; 
some meaning by the words, a high or low nominal 
rate ; others, a high or low degree of comforts en- 
joyed by the laborers, as the fruit of their wages ; 
others, still, as Ricardo, using the words high and 
low in relation only to profits, in which last sense, 
if wages are high, profits are low, and conversely. 
In the first two senses, wages and profits may both 
be high, or both be low, at the same time and place, 
but not in the last sense. When the first sense is 
meant, the expression should be money wages; when 
the second, real wages; when the third, relative 
wages. Had this nomenclature been adopted and 
consistently employed, many an angry dispute and 
many a false conclusion would have been avoided. 
Also, it has been thought by some, that high money 
wages create high prices of commodities, that is to 
say, that things are dear because laborers have been 
paid a high price for their agency in producing them. 
This does not follow. Their labor may be very 
efficient, and may be assisted by first-rate machinery, 
and the price of the commodities may be low, 
although the money wages may be high. Money 
wages must not be confounded with cost of labor, 
because it is only one element of cost of labor. A 
higher cost of labor in any department of produc- 
tion, other things being equal, will tend to raise the 
price of the product, but not higher money wages 
alone. Price is value expressed in money, and gen- 



218 ELEMENTS OF POLITICAL ECONOMY. 

eral rise or fall of prices is usually due to changes 
in the currency. An inflated currency produces 
high prices, first of commodities, later of labor, later 
still of land, and last of all if at all of produce, 
some part of which is exported, and whose whole 
price tends to be the foreign price of that part. A 
common cause raises both labor and goods. On the 
other hand, it is sometimes supposed that the exact 
reverse of this takes place, and that money wages 
become high simply because the commodities which 
the laborers consume have become high. This is 
an error similar to the other. If an inflation of the 
volume of the current money of the country has 
supervened, then the price of labor rises by the same 
impulse that carries up the price of commodities. 
Both are effects ; neither is the cause of the other. 
But if the currency has remained sound and stable, 
a high price of any of the commodities consumed 
by the laborers, has no tendency, that I can perceive, 
to raise the rate of money wages. The higher 
price of those commodities may have arisen from 
deficient harvests, or from a higher cost of labor in 
those departments, from inequality of taxation, or 
other similar causes ; but no one of these enables 
capital to share the gross proceeds of production on 
better terms with labor. Neither money, nor real, 
nor relative wages can rise, as I see, merely from 
high prices of the commodities which the laborers 
consume. It seems to me, accordingly, that much 
clear light is thrown from this analysis of the cost of 
labor upon the whole vexed question of wages. 

The third ulterior purpose of presenting this an- 
alysis is briefly to unfold the principles according to 



ON COST OF PRODUCTION. 219 

which the division between wages and profits is 
practically made. It was Mr. DeQuincy who first 
called profits the leavings of wages ; but this is only 
true when by wages is meant the cost of labor. The 
gross products created by the combined action of 
capital and labor belong in common to the capital- 
ists and laborers, and are to be divided between them 
in some way, and the analysis in question enables 
us to perceive just how they are divided. Cost of 
labor being deducted, the rest goes to capital as a 
matter of course, and the proportion of this part to 
the whole capital marks the per cent, for the given 
time. If this part falling to capital is large for 
every hundred invested, the rate per cent, is high ; if 
small, low. The efficiency of labor and the state of 
the currency being as before, a rise of money wages 
will lessen profits, but no rise of money wages ac- 
companying increased efficiency of labor, or result- 
ing from inflated currency, has a tendency to lessen 
profits at all. The capitalist as such is interested iii 
having cost of labor low, but not in low money 
wages necessarily, because a low cost of labor is 
consistent with high money wages, and with high 
real wages too. Very efficient labor may be very 
highly paid, and yet leave to capital a high rate per 
cent. We here see again from another stand-point, 
and from a deeper view, a truth we have seen before, 
that there is no real antagonism but a real harmony 
of interests between capitalists and laborers. Both 
are alike interested in the combined efficiency of 
capital and labor, that is to say, in the amount of 
gross products created; and, in respect to the divis- 
ion of this gross amount, there is no more collision 



220 ELEMENTS OF POLITICAL ECONOMY. 

of interest than in making the dividends of the year 
among the partners of a commercial house. The 
cost of labor must first be defrayed ; and this de- 
pends on its efficiency, its nominal rate of remunera- 
tion, and the present purchasing-power of money. 
What is left is gross profits, and the relation that 
this bears to the whole capital invested decides the 
rate per cent. So far of cost of labor. 

2. The second element in the cost of production 
is the cost of capital; and this also must be analyzed 
into three variables, no one of which can be safely 
neglected in a computation which has for its object to 
decide a prospective cost of production: — 1st, The 
rate per cent. ; 2d, The time for which the capital is 
advanced ; 3d, The form of the capital as liable to 
slow or rapid deterioration. We must look at the 
influence of each of these elements on cost of pro- 
duction. 

(1.) Let us suppose that the rate per cent, at Am- 
sterdam is 3, and the rate at New York is 7, that 
the cost of labor is equal in the two cities, that the 
time of advance is one year, and that there is no 
liability of the capital to wear out ; a commodity 
made at Amsterdam with an outlay of $100 can be 
sold for $103, while the same commodity made at 
New York with the same outlay cannot be sold for 
less than $107. The current rate per cent, is one 
element of the cost of capital, and through this, of 
the cost of production. 

(2.) The effect of the time of advance on cost of 
capital is more striking. Let the same supposition 
be continued, except that the time of advance in 
New York be extended to four years. The com- 



ON COST OF PEODUCTION. 221 

modity will sell in Amsterdam, as before, at $103, 
but in Nev7 York for not less than fl31. This 
principle is well illustrated also in the case of wine, 
which to reach its perfection requires to be kept a 
number of years. Even under the same rate per 
cent, which we will suppose 6, a commodity made 
in six months with an outlay of f 100 may sell for 
$103; while wine grown in the same six months 
at the same outlay, kept five years, cannot be sold 
without loss for less than $133. If the period of 
advance be long, and the rate per cent, be high, the 
cost of capital from the two causes enhances enor- 
mously the cost of the product ; so that, it is only 
countries like England and Holland, in which the 
rate per cent, is very low, which can successfully 
engage in enterprises requiring a large capital to be 
invested for long periods before returns are realized. 
This accounts for the fact that mining operations in 
Mexico and South America have been largely carried 
on by foreign rather than American capital. One 
million of Dutch capital at three per cent., expecting 
to realize returns only after twenty years, will be 
remunerated by a product selling for $1,806,111 ; but 
under like circumstances, American capital at seven 
per cent., must have a return of $3,869,685, or lose. 

(3.) Most forms of capital, especially that invested 
in buildings, machinery, and the like, more or less 
rapidly wear out, and a sinking-fund must be re- 
served from gross profits in order to replace the prin- 
cipal. This is the third element in cost of capital, 
and through this cost, influences the cost of produc- 
tion, and through cost of production, affects, in the 
manner already pointed out, the value of the prod- 



222 ELEMENTS OF POLITICAL ECONOMY. 

uct. Suppose there are two commodities A and B 
produced in two establishments, in each of which is 
invested a capital of $11,000, in one of which is a 
machine costing f 1000, which is wholly worn out by 
one year's use, and in the other a machine costing 
the same sum, which will last however for ten years. 
Let the rate per cent, be ten, and the time consumed 
in completing the products be one year. There is a 
difference in the cost of capital in the two establish- 
ments, and this difference indirectly but immediately 
appears in the value of the respective products. To 
A must be charged not only $1100, the interest on 
the capital at the cun-ent rate, but also another 
$1000, wherewith to replace the machine already 
worn out by the year's production. A cannot be 
sold without loss for less than $2100. B however 
will cost less. To it must be charged, as before, 
$1100, current rate of profit on the capital invested, 
and only $100 to replace after ten years' use the 
machine. B therefore can permanently sell without 
loss for $1200. 

Now, then, if my readers are willing to follow me 
a little further along this dry and dusty road, we 
shall be able to draw some important conclusions in 
respect to value as depending on wages and profits. 
While we have been seeming to attend to only one 
of the four elements out of which value springs, 
namely, one effort, of which cost of production is 
always an exact measure whenever the effort is em- 
bodied in a commodity made jointly by paid labor 
and capital, we have really been attending to the 
other effort also whenever that effort is similarly 
embodied ; and since gold and silver money is a 



ON COST OF PRODUCTION. 223 

commodity, like any other, we have incidentally, in 
this analysis of cost of production, taken some steps 
towards determining the value of money. Now, 
cost of production is made up of cost of labor and 
cost of capital, and the first general conclusion is, 
that if the cost of labor for any reason be enhanced, 
nothing can prevent this higher cost from taking 
effect and exhibiting itself in lower profits. The 
second conclusion is, that money-wages, or any rise 
or fall of them, provided they are uniform, or uni- 
formly rise and fall, in those departments of produc- 
tion whose commodities exchange with each other, 
have no effect at all upon value, since they are com- 
mon factors in two costs of production, and like all 
common factors, cancel each other; but any inequal- 
ity of money- wages in these departments that affects 
the cost of labor, will have an indirect but controlling 
influence on the value of the commodities. The 
same is true of profits. So far as the rate per cent, 
is common to all branches of production, the capital 
advanced for the same period, with a similar risk of 
deterioration or loss, and so far as any one or all of 
these advance or recede uniformly and together, they 
do not affect the value of any of the commodities 
produced. But inequality in any one of these points, 
varies the relative cost of capital, and consequently, 
the cost of production, and consequently the value 
of the product. It is at this point precisely that 
there is opened up to us a clear view of the influence 
of machinery upon values. So far as machinery 
brings into play, as it always does, a gratuitous 
natural force, it is outside the pale of value ; but 
since the machinery itself is one important form of 



224 ELEMENTS OF POLITICAL ECONOMY. 

capital on which rate per cent, must be paid, the 
more machinery employed relatively to labor in the 
production of commodities, the more do profits enter 
into the cost of production, and the more powerfully 
do changes in the rate per cent., in the time of ad- 
vance, and in the risk of deterioration, tell upon the 
value of commodities so produced, as estimated in 
other commodities. 

In other words, the more, or the more durable the 
machinery in the production of a commodity, the 
larger the element of profit in the price now abso- 
lutely reduced ; on a rise of the rate per cent, there- 
fore, the value of the commodity made by more or 
more durable machinery will relatively rise. 

Having traced completely the influence of ma- 
chinery on profits, a few things must now be said on 
its influence upon wages. Formerly the prejudice 
was almost universal, and is still wide-spread in 
many parts of the world, that the general introduc- 
tion of labor-saving appliances does an injury to the 
laborers by taking away their work. So strongly 
has this been felt by the laborers, that in England, 
and especially in Ireland, mobs and riots have usu- 
ally accompanied the introduction of machinery into 
those departments of production in which hand-work 
had previously prevailed. If work were what labor- 
ers really wanted, the prejudice in question would 
cease to be such, and become a sound opinion; since 
the only object and result of introducing machinery 
is to lessen work, at least with reference to a given 
product ; and the laborers, to be consistent, should 
not stop with opposing new inventions, but should 
destroy all forms of existing capital, that there might 



ON COST OF PRODUCTION. 225 

be work a plenty for simple human hands. What 
the laborers really want, however, is not work, but 
wages, or rather, those commodities for which their 
wages are expended ; and the question is, whether 
labor-saving processes tend to lessen, not work, but 
work's remuneration. There is no form of proof 
that I know of, which amounts to a moral demonstra- 
tion that the substitution of machinery for labor can- 
not lessen the laborer's wages; the opposite has per- 
haps sometimes happened, and is possibly liable to 
happen, especially in agriculture, in certain transitory 
states of society. But the general appeal can be 
made to experience with all safety. As a matter of 
fact and experience, it has not been found true that 
the introduction of improved processes, the substitu- 
tion of Nature's forces for human muscle, has deteri- 
orated the condition of laborers in those departments 
into which the inventions have been brought, or the 
condition of laborers generally. Exactly the reverse 
has usually taken place ; and wages are apt to be 
highest rather than lowest in connection with the 
most and the most durable machinery, and higher 
rather than lower, after the introduction of more and 
better machinery. Operatives in manufactories, for 
instance, are, as a rule, better paid than farm labor- 
ers ; and better paid in the first class than in the 
inf(3rior establishments. Teamsters, in this country 
at least, and I suspect in all countries, are as well to 
do as before the construction of railroads. So of 
spinners, weavers, and artisans of every name. In 
explanation of these general facts, it may be noticed, 
(1) that labor is always required in the construction 
and repairs of all kinds of labor-saving appliances, 

15 



226 ELEMENTS OF POLITICAL ECONOMY. 

and so far forth, a new market for labor is opened 
up in place of any loss of market possibly resulting 
from their introduction ; (2) these forms of capital 
always tend to cheapen the products which they 
help to create, and such products because they are 
cheap find a wider circle of consumers, and more 
must be produced to supply a now broader market, 
and so far forth the demand for labor may be strong- 
er than it was before ; (3) These improvements 
cheapen also the commodities consumed by the 
laborers themselves, and therefore a given rate of 
wages now secures for them a higher grade of com- 
forts. Combining these observations with the law 
of distribution already pointed out, and the conclu- 
sion is fairly established that the effect of machinery 
is, and will be, rather favorable than otherwise to 
the laboring classes. 

Now, as a result of this entire discussion, atten- 
tion must be called to a generalization, which has 
been more or less fully noticed by several writers, 
and with the presentation of which, this branch of 
the subject will be concluded. Since, by the aid of 
the different forms of capital, and such a division of 
labor as that every part of it is made most efficient, 
the cost of production of most kinds of manufac- 
tured articles tends to decline as compared with the 
cost of production of food and raw materials, in 
whose production these advantages are less perfectly 
attainable, there is a constant tendency towards 
approximation in the value, and, if money remain 
unchanged, in the price, of raw materials and of 
finished products ; and in the degree of this approx- 
imation will be found a gauge of the success with 



ON COST OF PRODUCTION. 227 

which gratuitous natural forces and inaproved facili- 
ties of art have been made available in production. 
This single statement, clearly perceived in its 
gi-ounds, grasps and holds the principal results of 
our discussions thus far. Examples of the principle 
offer themselves on every hand. Let us look at 
cotton cloth ; an example somewhat marred at the 
present moment by the consequences of the late civil 
war, and disguised by a depreciated currency ; but 
which, allowance being made for these, is an excel- 
lent illustration. At the opening of this century, 
the average price of raw cotton was just about 
twenty cents a pound ; at the middle of the century, 
and onwards, the average price was just about ten 
cents a pound. At the first period, although accu- 
rate tables are wanting, the average price of cotton 
cloth could not have been less than sixty cents a 
yard ; at the second period, it could hardly have been 
more than ten cents a yard. The absolute price of 
raw cotton diminished in the interval in the ratio of 
2 to 1 ; while the absolute price of cotton cloth 
diminished in the interval in the ratio of 6 to 1. 
Relatively to a yard of finished cloth, the raw mate- 
rial greatly rose in value, since at the first it took 
three pounds to buy a yard, and at the last but one 
pound. There was a marked approximation all the 
while of the price of the finished product towards 
the price of the raw material; in other words, less 
and less difference of price was due to the cost of 
manufacture, which lessening cost marks the ever- 
increasing efficiency in the production of commodi- 
ties of the gratuitous powers of Nature applied 
through machinery. According to Dr. Ure, the in- 



228 ELEMENTS OF POLITICAL ECONOMY. 

troduction of machinery into the manufacture of 
lace, lessened the cost of that product in the ratio of 
50 to 1 ; and thereby, and to that degree, approxi- 
mated the price of a pound of such lace towards the 
price of a pound of the cotton from which it was 
made. Food, raw materials, and labor, and the last 
more than the other two, tend steadily to advance in 
their power to command, that is, to buy, most kinds 
of finished products ; and therefore, the millions who 
labor with their hands, and the other millions who 
own the soil and till it, have already advanced, and 
will still more advance, in a scale of comforts, with 
the advancing centuries. 

In the opening paragraph of this treatise it was 
stated, that to unfold the Science of Political Econ- 
omy in a proper order and completeness would 
require three things: namely, first, an analysis of the 
principles of human nature out of which exchanges 
spring ; second, an examination of the relations of 
men to the physical earth and to each other, by which 
God's design is manifest that exchanges should be 
practiced; and third, an inquiry into the laws and 
usages devised by men to facilitate or impede ex- 
changes. According to this plan, the first and sec- 
ond general branches of the subject have now been 
treated, and we pass to the third, beginning with 
Money. 



ON MONET. 229 



CHAPTER X. 

ON MONEY, 

There is no use in saying that money is such a 
mysterious and complicated agent that nobody can 
understand it. That is the language of indolence. 
Money is wholly a matter of man's device ; it was 
invented, just as any other instrument is invented, 
to accomplish a certain purpose ; and it would be 
strange if men cannot comprehend what men them- 
selves have devised. In all departments of God's 
works, indeed, we constantly meet with what can- 
not be fully comprehended nor perfectly fathomed, 
because an infinite mind has been there at work 
upon an infinite plan. But there is no such profun- 
dity in the works of men ; unfathomableness is not 
an attribute of human skill ; and since money is an 
instrument devised by men to aid them in accom- 
plishing a certain purpose, it is as unreasonable to 
pretend that it is incomprehensible, as it would be 
to pretend that the steam-engine is incomprehen- 
sible. I hold it for certain that whatever men have 
devised, men can comprehend. 

The general purposes which money was designed 
to answer, and which it is found admirably to fulfil, 
are best perceived under the supposition that there 
were no money. Exchanges began, and were profit- 
able, long before money came into existence. Men 



230 ELEMENTS OF POLITICAL ECONOMY. 

first exchanged services directly for each other, with- 
out the intervention of any medium. This form of 
trade is called Barter. Hiram, king of Tyre, fur- 
nished to Solomon a certain quantity of cedars from 
Lebanon, and Solomon, in return, furnished the Tyr- 
ians a certain quantity of wheat and oil. This may 
serve as an instance of barter, although money had 
been in current use long previously to that transac- 
tion, as is seen in the purchase by Abraham of the 
cave and field of Machpelah, for which he weighed 
out four hundred shekels of silver, current money 
with the merchant. It is obvious, however, that 
while barter is a great deal better than no exchanges 
at all, there are inherent difficulties in that form of 
exchange. Under pure barter, exchanges are pretty 
much limited to those parties each of whom is in 
position to render to the other such services, and in 
such quantities, as the other stands in direct and im- 
mediate need of; it is not enough, under these con- 
ditions, that a man should have a service to sell, but 
also he must find a man who wants that specific 
service, and more than this, a man who not only 
wants that specific service, but also has a service to 
render in return, such as the first man wants. If A 
has wheat which he wishes to exchange for a coat, 
he must find a party who wants wheat, and who 
also is in position to render a coat in exchange for 
it, and moreover who wants just as much wheat as 
will pay for a coat, no more and no less; if he wants 
more, he may have nothing to render in exchange for 
the excess which A is willing to accept ; if less, A 
may have nothing which the other wants, besides 
wheat with which to help pay for the coat. Even in 



ON MONEY. 231 

the simpler states of society, the inconvenience, loss 
of time, and deterioration of commodities involved in 
direct barter, are very great, and in more advanced 
states of civilization would be intolerable, if it were 
possible, as it is not, for society to become advanced 
under those conditions. Exchanges are so limited 
in time, place, and variety, association is so ham- 
pered, and the development of all peculiar talents so 
impeded, under a system of simple barter, that one 
of the initial steps in the progress of all societies 
has been to hit upon some expedient to lessen 
these intrinsic difficulties ; and so to facilitate ex- 
changes. This expedient has been the invention 
of money, that is to say, the selection of some prod- 
uct, which, by general consent, instead of the par- 
ticular purchasing-power of common commodities, 
should have a universal purchasing- power ; so that, 
whenever anybody has anything to exchange, he 
may first exchange it for this product, whatever it 
be, and then with this product purchase at any time 
and place, whatever he may want. Money makes 
no alteration in any law of value, but merely sub- 
stitutes for convenience' sake in every transaction 
in which it plays a part, a universal for a specific 
purchasing-power; a book, for example, has a specific 
purchasing-power; there is somebody who wants it, 
and is willing to give a sum of money for it; and 
the owner by the sale of it parts with a product 
which has only the power to purchase something 
from a few persons, and receives a product which 
has the power to purchase something from all per- 
sons ; it is not true to say that the book is worth 
more than the money, or the money is worth more 



232 ELEMENTS OF POLITICAL ECONOMY. 

than the book, because they are just worth each 
other, as is demonstrated by the sale ; but it is true 
to say that the seller of the book has substituted in 
the place of a limited purchasing-power, of which 
he was proprietor, a general purchasing-power, of 
which he has now become proprietor ; and that the 
command of the money, which has no more value 
than the book had, does carry along with it a supe- 
rior command over purchasable articles generally 
In one word, value in the form of money is in a 
more available shape for general purchasing, than 
value in any other form. This is the exact expression 
for what truth there is in the common vague remark, 
that money is different from all other commodities ; 
in point of value, it is different from other commodi- 
ties in just one respect, namely, while they have the 
power of buying some sorts of things from some per- 
sons, it has the power, derived from the usages of 
society, to buy all sorts of things from all persons. 

It might seem, at first sight, as if the introduction 
of money, instead of simplifying the operations of 
exchange, would only complicate them, since it 
necessitates two exchanges, where otherwise there 
would be but one ; but reflection, as well as experi- 
ence, is able to convince us that there is no machine 
which economizes labor like money ; no instrument 
which -plays so important a part in production ; no 
invention, unless it be the invention of letters, which 
has contributed more to the civilization of mankind. 
While men still exchanged in kind, and knew no 
other mode, the purch-asing-power of a service was 
very much confined in place, and would not be 
parted with except in view of the return service 



ON MONEY. 233 

actually there present, the ultimate parties to an 
exchange must for the most part come together 
locally, in order to effect an exchange ; under a 
money system, this is no longer necessary, for it is 
sufficient to constitute a market for any commodity 
that it is wanted anywhere on the globe, the middle 
man, paying the seller for it in money, transports it 
thither, and receives back his money with a profit 
from the ultimate consumer. Thus money brings 
conveniently buyers and sellers together commer- 
cially, no matter how far separated locally. So, 
also, money generalizes any purchasing-power in 
point of time. The fruit-dealer, for example, must 
dispose of his product quickly, or it perishes on his 
hands, but by transmuting his perishable product 
into money, he may keep its power of purchase 
locked in this form as long as he lists ; the money, 
indeed, is only good to purchase with, but it puts an 
interval at the pleasure of the holder between sell- 
ing and buying, and with this generalized power in 
his pocket he may buy when he will, and what he 
will, and where he will. Money, too, makes any 
purchasing-power portable, divisible, and loanable. 
A man may carry the value of his farm in his purse, 
and may divide it up for a thousand different pur- 
chases, and especially is able to loan it in this form, 
to receive it back again with interest at a future day. 
Value in any other form than money is not gener- 
ally suitable for loaning, because there are com- 
paratively few who are willing to borrow a merely 
specific purchasing-power, and guarantee its return 
in that form with the due increase ; but money, as a 
generalized agent, will command all services at all 



234 ELEMENTS OF POLITICAL ECONOMY. 

times, will serve at any man's bidding, and work in 
all sorts of harness, and therefore it is rarely difficult 
for men to loan any sums of money they have not 
immediate use for, and to make every moment of 
their own abstinence pay tribute in interest, and the 
advantages to both lenders and borrowers secured 
through this form of value — money — are incalcu- 
lable. Thus we see the reason why governments, 
corporations, and individuals, when they borrow, 
borrow money. This general view of the uses and 
advantages of money will show it to be one of the 
most potent of the social agents, and will serve also 
to introduce our first specific proposition. 

1. Money is a medium of exchange. 

The word medium in this proposition, is to be 
taken in its etymological and strict sense, as some- 
thing that comes between two extremes, and serves 
also to relate them to each other. Money is ex- 
changed for other things, as a means, and not as an 
end ; it is a very great help in exchanging all other 
things, but is never exchanged for itself in an ulti- 
mate transaction. Small boys, indeed, swap cents, 
but men, the miser excepted, who is under a deplor- 
able fallacy of the senses, use and estimate money 
first as the medium which facilitates the real ex- 
changes of society. What is really exchanged is 
the wheat, the cloth, the lumber, the furniture, the 
service of every kind, and money is but the instru- 
ment making those exchanges easy, which might 
perhaps go on without it, though with difficulty and 
loss It is somewhat like a railroad ticket. Trans- 
portation to a given place is what is really bought 
when one buys a railroad ticket. The evidence of 



ON MONEY. 235 

the purchase is the bit of paper. It comes in as a 
medium between the traveller and the railroad com- 
pany, and while it facilitates the real exchange, it 
also partly disguises it. The resemblance holds in 
the main feature, but in two respects the likeness 
fails; money is not a specific ticket for one purpose, 
but is a general ticket for all purposes of purchase ; 
and secondly, metallic money stands as a value in its 
own right, at the same time it is serving as a me- 
dium, while the ticket does not. Still, we are all 
desirous to get money, not for the sake of the money, 
but for the sake of those things which the money will 
buy. We part with it freely and constantly for those 
things which we care more about. What we really 
care for is what the money will buy, is the command 
over all services and commodities which the posses- 
sion of money insures. If we could give our own 
service or commodity, whatever it is, and receive 
directly in return the service or commodity which 
we want, whatever it is, there would be no need of 
money. This is generally inconvenient, and some- 
times impossible. Therefore we introduce a middle 
term between the two extreme terras. Money la 
a good mean which helps exchange the two ex- 
tremes. 

But we must be careful not to suppose that all 
the exchanges of a country, or those between differ- 
ent countries, are mediated by money directly. Some 
exchanges still proceed in the way of barter ; many 
more proceed by means of instruments of credit, 
particularly bills of exchange, all of which will be 
fully explained in the chapter following the next. 
Money, indeed, is indispensable as a medium direct, 



2£6 ELEMENTS OF POLITICAL ECONOJVIY. 

and always wiJl be; it is also indispensable as alone 
capable of furnishing those denominations of value, 
like the dollar, which are always used in bargaining, 
and in those multitudinous cases of credit, in which 
settlement is made not by money but by offsetting 
one piece of indebtedness against another; but it 
must always be borne in mind that increase in the 
number of exchanges does not necessarily require 
an increase in the volume of money. Credit, as we 
shall see, is more and more taking the place of 
money direct. Also, the power of money as a me- 
dium is multiplied by what has been called rapidity 
of circulation, by which is meant, that a brisker use 
of the volume already in circulation will reach the 
same end as an increase of its volume. As in me- 
chanics, so in money, the whole power is the prod- 
uct of mass and velocity. Money is like any other 
tool; the more constant its use the more profitable 
its agency. The quick movement of a small mass 
is better than the torpid movement of a large mass, 
both in what it saves of expense, and in what it 
presupposes of the general conditions of exchange. 
The value of the money of any country is a small 
fraction of the value of that which it helps to ex- 
change directly ; and a very small fraction indeed 
of the value of that which it helps to exchange in- 
directly through credit by means of its denomina- 
tions. Therefore we see that the hub and spokes, 
and rim of the wheel of exchange consist of ser- 
vices and commodities of every description ; while, 
to borrow the famous comparison of Hume, money 
is but the grease which makes the wheel turn easier. 
It is a vast mistake to suppose that the grease is the 
wheel itself. 



ON MONEY. 237 

Hume's comparison, though exact as far as it goes, 
and for the purposes for which he used it, is never- 
theless capable of misleading the mind. It is true 
that money is the grease which facilitates the revo- 
lution of the wheel of exchange, but it is also true 
that the dimensions of the wheel itself are vastly 
greater than they would have been had it not been 
for money. Money indeed helped exchange the prod- 
ucts that already existed at its first invention, but 
by far the largest part of products since have come 
into existence largely through the agency of money. 
We get quite too low a view of the function of 
this potent agent, if we think of it merely as an 
aid in circulating products that would have existed 
whether or no ; some products would have existed 
whether or no, and money certainly is of great use 
and convenience in helping bring these to the ulti- 
mate consumers ; but this is a partial and wholly 
inadequate view of the true function of money as a 
medium of exchange. The fact that such a medium 
is in universal circulation, and that the holders of 
it are ready to exchange it against any sort of ser- 
vices adapted to gratify their desires, exercises a 
kind of creative power, and brings a thousand prod- 
ucts to the market which would otherwise never 
have come into existence. Since money will buy 
anything, men are on the alert to bring forward 
something which will buy money; and since money 
is divisible into small pieces, an incredible number and 
variety of small services are brought forward to be 
exchanged against these pieces, which services we 
have no reason to suppose would ever be brought 
forward at all, were it not for the strong attraction 



238 ELEMENTS OF POLITICAL ECONOMY. 

of the money. In this point of view, the true 
nature of money is best perceived, when it is con- 
sidered, as it really is, as a very important portion 
of the capital of the world. Capital, as we have 
already learned, is any product reserved to be em- 
ployed in further production. The circulating me- 
dium of any country is the most active, the most 
profitable, and the most essential of all those instru- 
ments reserved in aid of further production. The 
axe, the plough, the spindle, the loom, the wheel, the 
engine, are all instruments, are all capital, and they 
each aid respectively some part or parts of the pro- 
cesses of production ; but money is a form of capital 
which stimulates and facilitates all the processes of 
production without exception. Just as we have seen 
that money is a form of value generalized, so is it also 
a generalized form of capital, that is to say, it is an 
instrument capable of aiding all production in every 
department, while every other instrument is capable 
of aiding but few processes in one department. 
Without money, there could be no thorough division 
of labor, because there would be no adequate means 
of estimating or rewarding each one's share in a com- 
plicated process. By means of money, all services. 
small or great, contributing toward a common prod- 
uct, are neatly measured and paid for by some 
one, who thereby becomes proprietor of the whole 
product; or, if the contributors choose, they may wait 
till the product itself is sold, and then the money 
received is divisible without loss to each contributor, 
according to the service rendered. Thus the influ- 
ence of money, as capital, pervades the whole field 
of exchange, from centre to circumference, facilitat- 
ing every transfer, and stimulating to new transfers. 



ON MONET. 239 

Money, then, is a medium of exchange; and the 
question arises in this connection, how much of it is 
wanted ? Clearly, only so much as will serve the 
purposes which such a medium is fitted to subserve; 
there should be enough fairly to mediate between 
the services actually ready to be exchanged then 
and there, and also enough fairly to call out other 
services, proper and profitable in the then circum- 
stances of society, and whose only obstacle to a 
profitable exchange then and there, is the lack of a 
facilitating medium. All increase of money beyond 
this point, which the very nature of money itself 
marks out as the boundary, leads to a diminution 
in value of every part of it, to a consequent dis- 
turbance of all existing money contracts, to a uni- 
versal rise of prices which are illusory and gainless, 
to unsteadiness and derangement in all legitimate 
business, and to a spirit of restless enterprise and 
speculation, which seeks to draw off the excess of 
money in untried and reckless experiments. These 
consequences from this cause have been again and 
again witnessed in every commercial country, and in 
the United States on a gigantic scale during the 
twelve years past. I cannot help thinking that Mr. 
Carey, who has thrown so much light on certain 
portions of the field of Political Economy, is de- 
cidedly in the \vrong in the view he maintains that 
there cannot be too much money in any country. 
No writer has brought out more clearly than he has, 
the intimate relations of money with all industrial 
development; but he seems at times to forget that 
money, essential and potent as it is, is essential 
and potent only as a medium. The real subjects of 



240 ELEMENTS OF POLITICAL ECONOMY. 

exchange are mutual efforts, mutual services, and 
money is the instrument merely that comes in be- 
tween the real services exchanged to facilitate the 
exchange ; and therefore it seems to me to be per- 
fectly conclusive on the point to remark, that the 
quantity of money needed in any country, or in the 
whole world, is limited by the number of the ser- 
vices ready to be exchanged, to facilitate the ex- 
change of which is the good purpose and end of 
money. The physical and mental powers of men, 
which alone give birth to services, when considered, 
as they must be in this connection, as belonging to 
a given number of men at a given time and place, 
are strictly limited; and although the presence of 
money then and there is both a stimulus and an aid 
to their bringing forward services of all sorts to the 
raarliet, there are obvious limitations both in their 
powers and in their circumstances ; and the quan- 
tity of money needed among them is just that 
quantity which will fairly act as a medium in ex- 
changing the services which they are able and 
willing to render to each other. All increase in 
the quantity of money beyond that point would 
have, and could have, the only effect of increasing 
the nominal prices of services, without making the 
services themselves any greater in number or better 
in quality. It is with money exactly as it is with 
any other form of capital, allowance being made for 
the fact that money is a kind of generalized capital. 
How many ships does a commercial nation need to 
employ ? As many as will fairly take off its exports 
and bring in its imports. Ships are wanted for one 
definite purpose ; and when enough are secured to 



ON MONEY. 241 

answer that purpose, all additions to the number will 
lessen the value, that is, the purchasing-power of 
ships generally. So of all instruments whatever. 
Enough is as good as a feast. Enough is better 
than more. In regard to every form of capital, the 
point of sufficiency is determined by the quantity of 
work to be done. Now, money is a form of capital, 
an instrument, having this peculiarity only, that it is 
capable of aiding to a certain extent all branches of 
production ; and the point of sufficiency in the quan- 
tity of money for a country, or for the world, is de- 
termined by the amount of products of all kinds, 
otherwise ready to be exchanged, and only waiting 
the facilitating agency of an exchange medium. 

It only remains under this proposition to add, 
what will be more clearly perceived when we come 
to treat of foreign trade, that no enterprising com- 
mercial nation, so long as the natural right of ex- 
change is left unimpeded, and so long as the money 
of the nations consists of gold and silver, or paper, 
legitimately promissory of these, can ever lack, for 
any great length of time, a sufficient quantity of 
money to serve as its medium of exchange. 

2. Money is a measure of value. 

I hope it was made very plain, under the preced- 
ing proposition, what is meant when it is said that 
money is a medium of exchange. Closely com- 
mingled with its function as a medium, money has 
another very delicate function, as a measure of value. 
How important this second function is may be seen 
by supposing for a moment that there were no in- 
strument in existence capable of performing it. 
Without a common measure of values of different 

16 



242 ELEMENTS OF POLITICAL ECONOMY, 

sorts, it would be inconvenient, not to say impos- 
sible, to carry on traffic at all. For instance : A 
baker has only loaves of bread, and wishes to buy a 
hat, a horse, a house. How many loaves shall he 
give for each ? Without some common denomina- 
tion in which these differing values can be expressed, 
and by means of which they can be brought into 
numerical relations with each other, it would be an 
awkward piece of business to effect even the three 
exchanges ; and every time he wished to purchase 
another article, there must be an independent cal- 
culation from different data, to decide the terms of 
the exchange. Introduce now some common denomi- 
nations in which each of these values can express 
itself, and the difficulty disappears in an instant. 
" My loaves are worth ten cents each," says the baker. 
" My hat is worth ten dollars," says the hatter. The 
terms of exchange, then, are 100 for 1, and no par- 
leying. So of the rest ; so of everything that is ever 
bought or sold. Dollars and cents are the denomi- 
nations in which values are reckoned, and by which 
they can be compared with each other numerically, 
just as feet and inches are the denominations by 
which different lengths are compared, and pints and 
quarts the denominations by which capacity is meas- 
ured ; and the builder and the surveyor would not 
be more at a loss in their work without the units of 
length, or the vintner without the units of capacity, 
than everybody would be at a loss without the units 
of value. Dollars and cents are, as it were, the 
language in which values express themselves ; and, 
without some such language, the busiest marts of 
exchange would soon become not only a silent but a 
deserted scene. 



ON MONEY. 243 

The difference between money as a medium and 
money as a measm-e is one that should be clearly 
delineated and perfectly apprehended, because there 
is no such thing as adequately understanding the 
subject of money unless the two functions be kept 
distinct in the mind, as well in their single as in their 
commingled action. The original measure of value 
in France, England, and Scotland, was the pound 
weight of silver. No coin of that weight was ever 
struck; but a pound of silver was cut into 240 coins 
called pence. Twelve of these pence were called a 
solidus, or shilling. Thus as applied to silver, the 
symbols lb. and <£ denoted equivalent weights, the 
former of uncoined metal, the latter of metal coined. 
But in course of time, more than 240 pence so called, 
and at last in Elizabeth's reign, 744 pence, came to 
be coined out of a lb. of silver. Yet all the while, 
240 of these pence were called a <£. £ and lb., both 
a contraction of the Latin libra, were no longer 
equivalent. The lb. of weight continued stable : the 
£/ of money had dwindled to less than one third. 
Yet the name pound continued to attach to 240 
pence, although the pence embodied a less and less 
quantity of silver. As the medium contained a less 
quantity of silver, so the measure, that is to say, the 
denomination, represented a less quantity of silver. 
This example will help us understand the difference 
between money as a medium and money as a meas- 
ure. Dollars and cents perform their duties as a 
medium by virtue of their being commodities ; they 
perform their duties as a measure by virtue of 
their being denominations. Yet the denominations, 
though spelled and sounded as before, vary with 
every change that takes place in the medium. 



244 ELEMENTS OF POLITICAL ECONOMY. 

There are two kinds of changes to which a metal- 
lic money is liable, considered as a medium of ex- 
change. First, a less quantity than before of a 
precious metal may go to a certain coin. In 1834, 
the gold eagle of the United States was reduced in 
weight from 270 to 258 grains, and the alloy in- 
creased to one part in ten from one part in twelve. 
This was taking out more than six parts of gold out 
of every 100 parts, in all the gold coins of the coun- 
try. Yet the coins bore the same names as before. 
As a medium, other things remaining equal, their 
purchasing-power was diminished more than six per 
centum ; and consequently, as a measure of other 
values, the denominations of these coins varied sim- 
ultaneously and equally with the coins themselves 
Secondly, coins are liable to change in their function 
as a medium from changes in the general purchas- 
ing-power of the metals themselves. If for any 
reason an ounce of gold will buy less of other things 
than formerly, the coins cut from that gold will buy 
less than formerly, and this change in the medium 
will be followed by a corresponding change in the 
measure. Other tables of denominations have a 
basis independent of the things which they measure, 
and are not variable by the quality or quantity of 
those measurable things. A French metre, for ex- 
ample, is an invariable unit of length the world 
over; so is one of Troughton's inches; but this is 
not true of the denominations of money at all 
Pounds, dollars, guildei's, francs, and their subdivis- 
ions, are denominations of value, which is a vari- 
able relation, and as denominations they follow the 
fortunes of the coins whose names they are. When 



ON MONEY. 245 

the current dollar, for instance, sinks to one half, or 
rises to twice its previous purchasing-power, we call 
it a dollar all the while, the denomination perpet- 
ually shifting with every variation of the thing. The 
same name attaches to a shifting denomination. 
The denominations of value, then, are not an inde- 
pendent standard to which values themselves can be 
referred, as lengths are referred to the metre, but 
vary with the varying purchasing-power of the coins, 
so that money as a measure is only uniform when 
money as a medium is uniform. So indispensable, 
however, in all exchanges is some common measure 
of value, that the denominations of money, notwith- 
standing their variable character, are universally em- 
ployed in estimating and exchanging commodities, 
even when no money as a medium is used. 

Without reflection, it might be supposed, that, 
since the measure rises and falls with the medium, 
no practical error is liable to follow the confounding 
of the two functions ; but it is the very sympathetic 
connection between the two that gives rise to the 
possibility of error. If the units of money were, 
like the linear units, inflexible, so that all variations 
of the medium could be instantly detected by a ref- 
erence to the standard of measure, there would be 
no difficulty at all : I could loan a thousand dollars 
for one year, or ten years, and, however much the 
medium might vary in the interval, be sure that I 
should receive back just as much purchasing-power 
as I loaned, with the interest on the same ; it might 
be more or fewer pieces than the number I loaned, 
which is a matter of indifference. As it is, no lender 
can have any such assurance. The borrower is 



243 ELEMENTS OF POLITICAL ECONOMY. 

bo and to pay back with interest the same number 
of dollars as he received, although the dollar-medium, 
and hence the dollar-measure, may meanwhile have 
fallen or risen greatly. In the United States, for the 
past twelve years, the current money has exchanged 
against gold from 110 to 285 of the one for 100 of 
the other; and it is very obvious that all debts of old 
standing, paid in this period, have been only legally, 
and not actually, liquidated ; and that debts con- 
tracted when the depreciation Was more and paid 
when it was less were more than actually liquidated. 
This, of course, presupposes, what we are not yet in 
a position to assume, that gold remained a proper 
and uniform standard. The subtle error to be 
avoided alike in discussion and in practice is, to 
suppose that money, either as a medium or as a 
measure, remains unchanged, simply because the 
name remains unchanged by which we designate 
its denominations. 

It may be asked, why cannot this source of error 
be obviated ? I reply, that the error may be obvi- 
ated, but the source of it cannot be obviated from 
the nature of the case. It was shown in our chap- 
ter on Value that to find an invariable measure of 
value is a natural impossibility. Money, as it is the 
medium of exchange, is also the best attainable 
measure of value, and is used throughout the civil- 
ized world to compare with each other all values 
except its own ; but since value in general, and the 
value of money as well, is a thing of relation, and 
varies with every change affecting either of Ihe 
things exchanged, as much by changes affecting the 
things it exchanges for as by changes affecting 



ON MONEY. 247 

itself, — the value of a hat, for instance, as estimated 
in gloves, increasing by any cheapened process in 
glove-making, though no change at all take place in 
the cost of hat-making, — a perfect measure of value 
is impossible. Therefore the denominations of 
money, which is the best attainable measure, can 
never have a meaning absolutely fixed, but slide up 
and down the scale along which the purchasing- 
power of money as a medium is moving, and they 
are consequently useless as a standard to detect any 
changes in the medium itself, while, the medium 
remaining uniform, they instantly detect the changes 
in all other purchasing-powers. This will always be 
so. The same difficulty does not occur in having a 
perfect measure of length or of capacity, — a perfect 
inch or a perfect pint. The French have a perfect 
system of measures and weights. Their mathemati- 
cians measured an arc of the earth's circumference, 
and thus determined the absolute length of a degi-ee 
of latitude. Three hundred and sixty times this 
length makes up the length of the earth's circumfer- 
ence, — an invariable measure recoverable again even 
if it should be once lost. This measure divided by 
40,000,000 gave the French nation their metre, which 
is a perfect unit for the measure of length. A tenth 
part of the metre cubed gave them their litre, which 
is a perfect unit for the measure of capacity. The 
weight of a hundredth part of a metre cubed of dis- 
tilled water at the temperature of maximum density 
is the gramme, an invariable unit of weight. A 
linear length of ten metres squared gives the are, the 
unit of surface. A perfect meae^ure of anything de- 
mands for its starting-point something absolute and 



248 ELEMENTS OE POLITICAL ECONOMi'. 

invariable : in value there is nothing absolute ; we 
begin with a relation, and therefore an unchangeable 
measure is not to be looked for. Still, it is vastly 
important for the interest of exchange that the 
accepted measure of value be as little liable to fluc- 
tuations as possible, especially in all cases in which 
lapse of time is involved before the exchange is fully 
consummated. For precisely the same reason that 
the bushel-measure should be of the same capacity 
in sowing-time and in harvest, to sell by and buy by, 
always a bushel, no more and no less ; and the yard- 
stick an inflexible measure of length, the same for 
buyer and seller, always thirty-six of Troughton's 
inches, no more and no less ; so, as far as it is pos- 
sible in the nature of things, ought the medium and 
hence the measure of values to represent year in and 
year out a uniform degree of purchasing-power. If 
money had but one function, namely, to serve as a 
present means of exchange ; if there were no credit, 
contracts, annuities, involving the element of time ; 
if the character of the medium did not also deter- 
mine the signification of the measure; then the sub- 
ject of money would be easily understood, and the 
substance that should serve as money would be a 
matter of comparative indifference. As it is, the 
second and more delicate function of money both 
complicates the theme, and excludes from the cate- 
gory of good money all but one or two of the sub- 
stances that have ever been used as money. We 
have just now seen the radical reasons why no 
money can even tolerably perform its function as a 
measure that is not tolerably uniform in its value as 
a medium. This consideration brings us naturally 
to our third specific proposition. 



ON MONEY. 249 

3. Gold and silver constitute the best money. 

The purposes of money have been served in dif- 
ferent countries and in different ages by a variety of 
products, according to the taste and circumstances of 
the people. Cattle have been employed as money 
among pastoral people in almost all periods of the 
world, and are still employed for this purpose in 
Africa. Slaves among the Anglo-Saxons; wampum 
among the American Indians; salt in Abyssinia; 
codfish in Newfoundland ; tobacco in Virginia; 
wheat in Massachusetts; nails in Scotland; stamped 
leather among the Carthaginians, and others ; bark 
stamped with the image of the sovereign in China ; 
platina in Russia; copper, simple or compounded 
with other metals, among the ancient Romans, and 
most other nations ; iron among the Spartans ; gold 
and silver among all civilized nations sooner or 
later ; have been or still are used as money. Of all 
these products, the two last have shown themselves 
to be best adapted for the purposes of money, and 
have come consequently into universal use in the 
commercial world. Experience has not only demon- 
strated the superiority of these metals over all other 
forms of money, as is shown by the fact of their 
universal adoption, but reason also is able to tell us 
why gold and silver are the best money. 

(1.) On account of their comparatively steady 
value. This is the main reason, and it must be 
firmly grasped. There is no end to the confusion 
which has crept over discussions on money from the 
circumstance that the writers have not first of all 
determined for themselves with fixed clearness what 
value is. This must be done at the outset, if there 



250 ELEMENTS OF POLITICAL ECOKOMY. 

id to be the least hope of sound results. Some writ- 
ers speak of money as destitute of intrinsic value, 
because we cannot eat it, drink it, wear it, or make 
any other direct use of it. Mr. Macleod, the emi- 
nent English economist, to whom I have already 
acknowledged myself as under many obligations, re- 
gards money as required only to measure, record, and 
transfer debts. Money is, according to him, a repre- 
sentative of debt. Now, I cannot agree with either 
of these representations. Value is value, and there 
is only one kind of it, and the epithet intrinsic is 
only used to help out a lame theory, and no such 
epithet is pertinent to the word value, and no one 
can show anything different in the value of money, 
either in respect to the way in which it arises, or 
in the laws which control it, from the value of 
any other commodity, excepting only the difference 
already pointed out, that money by the usages of 
society has a generalized instead of a specific pur- 
chasing-power. It is all false to speak of gold and 
silver money as the representative of value. It 
represents nothing but itself. It will buy other 
things certainly, and so will a bushel of w^heat. 
Value is simple purchasing-power, and money has 
value because we can purchase with it, exactly as 
everything else has value for that very reason. 
Society is so constituted that a want is felt in it of 
some medium of purchase ; this want cannot be 
supplied without an effort; whoever makes" the effort 
wall demand a corresponding effort made for him ; 
when it comes to the exchange of the medium for 
the wheat, for example, there stand face to face, as 
in every other instance of exchange, two desires and 



ON MONEY. 251 

two efforts ; there is then, as always, a reciprocal 
estimation of the two services about to be ex- 
changed, and the estimation agreed on is the value 
of the medium expressed in wheat. If the want of 
any medium of exchange is less felt in any commu- 
nity, or if the effort required to secure it be for any 
reason less, other things remaining the same, the 
value of the money will be less, that is to say, it 
will purchase less of other things. If the demand 
for money as an instrument of purchase be greater, 
or the obstacles in the way of its supply be increased, 
other things as before, the value of the money will 
be more. It is the old circuit over again of wants, 
efforts, estimations, satisfactions. The value of 
money arises under the same conditions as every 
other value, and is variable by any change in any 
one of the four elements which alone can vary the 
value of anything. Two desires and two efforts 
invariably precede every exchange. A change in 
any one of these, the rest unchanged, can vary value, 
and nothing else can vary it; and, as it seems to me, 
no person has ever shown or can show that the value 
of money is in any respect, save the superficial one 
already noticed, exceptional and peculiar. And it 
also seems to me that nothing more is needed in 
order to remove the last vestiges of the dark cloud 
which has so long overhung this subject, than to 
familiarize one's self first of all with the true doctrine 
of value m general, and then hold fast the truth, ex- 
emplified on every side, that the value of money is 
just like any other value. 

Gold and silver, then, as money, have value in the 
same sense and for the same reason as any other 



252 ELEMENTS OF POLITICAL ECONOMY. 

productive instrument, and we must now attend to 
tiie reasons why their value is so steady. 

(a.) On account of the comparatively steady de- 
mand for these metals. Gold and silver are wanted 
for two general purposes : first, to be used as money, 
and second, to be used in the arts; and it has been 
estimated that about two fifths of the aggregate 
quantity in the world is in the form of money, and 
the other three fifths in the form of plate, utensils, and 
ornaments. Now, so far as the element of desire 
controls value, the purpose for which any article is 
desired is a matter of indifference. The aggregate 
desire for it for all purposes, accompanied with the 
offer of something with which to buy it, constitutes 
the demand ; and the more universal the desire, no 
matter for what purpose, the steadier the demand, 
and, so far forth, the steadier the value. It is worth 
noticing, as a point still too little noticed, that it 
is not the demand for the precious metals as coin 
alone that determines their general value, nor the 
demand for them in the arts, but the combined de- 
mand for all purposes; just as the value of barley is 
regulated, partly by the demand for if for food, and 
partly by the demand for it for malting purposes. 
Hence an ounce of bullion of the standard fineness, 
destined for the smelting-pot of the artisan, is worth 
within a very trifle as much as an ounce of coined 
money. By the law of the Bank of England an 
ounce of standard gold is coined into <£3 175. lOld.^ 
and the Bank is obliged to buy all bullion and for- 
eign coins of the standard fineness offered to it at 
.£3 175. 9d. per ounce — a difference of three half- 
pennies. Now, gold and silver are so indispensable 



ON MONEY. 253 

ill the form of money, so beautiful in the form of 
ornaments, so well adapted to serve the purposes of 
luxury and love of distinction, so really useful in the 
arts, that the demand for them is constant and well- 
nigh universal; and if, in the progress of civilization, 
a less quantity should be desired for personal orna- 
mentation and purposes of luxury, a greater will 
doubtless be required for the other uses ; and so, as 
the demand in the past has been steady, and perhaps 
steadily increasing, there is every reason to expect 
the same for the time to come. And it contributes 
to the steadiness in value of the gold and silver coin, 
that there is at hand in the form of plate a reservoir 
from v/hich a chance chasm in the coin may be 
replenished, or an extra demand for it answered. 

(b.) On account of their tolerably uniform cost of 
production. Not desires alone, but efforts as well, 
regulate value. Supply is the correlative of demand; 
and when to a steady demand there answers a steady 
6upply, realized under conditions of pretty uniform 
difficulty, there will be of course a pretty steady 
value. Nature herself has indicated, in a manner not 
to be mistaken, her intention that these metals 
should be the money of the nations. She has 
scattered them all over the earth, and so scattered 
them that the cost of their production has been won- 
derfully uniform ever since civilization and commerce 
began. There have been but two marked changes 
in the value of gold and silver throughout the com- 
mercial world in the last thousand years ; the first, 
in the sixteenth century, in consequence of the occu- 
pation of Mexico and South America by Europeans, 
when the value of the precious metals diminished, 



254 ELEMENTS OF POLITICAL ECONOMY. 

silver a good deal, it is difficult to say how much, 
and gold considerably less; the second, in conse- 
quence of the discovery of the gold-fields of Califor- 
nia and Australia in the present century, which, it is 
thought by most, has still further diminished the 
value of gold. With these exceptions, and similar 
ones are not likely to recur, these metals have 
always maintained and are likely to maintain a 
remarkable uniformity of value, so far as uniform 
cost of production can give it. Even these changes 
became only gradually pei'ceptible, and did but lit- 
tle injury to individuals, scarcely disturbing the jus- 
tice of exchange or the measure of value, except 
in cases of long annuities and similar obligations. 
A universal rise of prices soon adjusted exchanges 
to the new state of things. 

(c.) On account of their quantity. The amount 
of gold and silver in circulation in the commercial 
world, to say nothing of the quantity so easily 
brought into circulation from the reservoir of plate, 
is so vast, that it receives the annual contributions 
from the mines much as the ocean receives the 
waters of the rivers, without sensible increase of its 
volume, and parts with the annual loss by detrition 
and shipwreck, as the sea yields its waters to evapo- 
ration, without sensible diminution of volume. The 
yearly" supply and the yearly waste are small in com- 
parison with the accumulations of ages; and therefore 
the relation of the whole mass to the uses of the 
world, and the purchasing- power of any given por- 
tion, remain comparatively steady. It is probable 
that production at the mines might cease altogether 
for a considerable inter^'^al without very sensibly en- 



ON MONEY". ^^y 

hancing throughout the commercial world the value 
of gold ; as it is certain, from experience, that a 
production very largely augmented only gradually, 
and after a considerable interval, diminishes its value. 
The mass of the precious metals has been aptly com- 
pared to the heavy balance-wheel in mechanics, 
which preserves an equable and working condition 
of the machinery under any sudden increase of the 
power, and even when the power is for a moment 
withdrawn. At this point a caution is needful. Be- 
cause it is affirmed that the great amount of the 
precious metals is a gi'ound of their firm value, it 
must not be supposed that we are going beyond our 
general doctrine, and introducing another element, 
namely, quantity, besides the four elements which, 
as we have so often alleged, can alone vary the 
value of any service ; quantity, in itself, is not an 
element capable of varying the value of anything, 
but taken in connection with durability, it is an 
element of what might, perhaps, with propriety be 
called the inertia of value, and tends to keep the 
purchasing-power of gold and silver where it is. 
Value and steadiness of value are two distinct 
ideas. The present value of an ounce of gold ex- 
pressed in any other commodity is decided by four 
things alone ; but other elements besides these may 
help determine that that ounce of gold shall have 
ten years from now a purchasing-power approxi- 
mately the same as now. It will depend, of course, 
in the last analysis, upon the relation of the then de- 
mand to the then supply ; yet the vast quantity of 
the precious metals in existence, combined with 
their durability, prevent those fluctuations in the 



256 ELEMENTS OF POLITICAL ECONOMY. 

supply which are so destructive to a steady value. 
It is not as with the fruits and the grains, whose 
value varies perpetually with the seasons, and which 
are so perishable that they must be sold soon or 
never : gold and silver are almost indestructible, and 
except by wear and accident, the existing mass is 
•not liable to be lessened, and in so far as the annual 
production from the mines exceeds the yearly waste 
there is a natural provision made for the natural in- 
crease of demand, to supply the wants of the world 
for currency and for the arts, without much disturb- 
ing the relation of the demand and supply. The 
quantity, in connection with the durability of the 
precious metals, helps preserve to them a tolerably 
steady value from generation to generation. 

(d.) On account of their fluency. Gold and sil- 
ver are in demand the world over. Having great 
value in comparatively small bulk, they are easily 
transported from continent to continent ; and when- 
ever, from any cause, they become relatively in 
excess in any country, and thus lose there a por- 
tion of their previous purchasing-power, there is an 
immediate motive to export them to other countries' 
where their power in exchange is greater, and thus 
the equilibrium is restored. The value of gold and 
silver throughout the commercial world is thus kept 
pretty steady by the facility with which they are 
carried from points where thej'- are relatively in ex- 
cess to points where they are relatively in deficiency. 
There is a gain in carrying them to those countries 
where their power of purchase is the greatest, be- 
cause more commodities can be obtained for them 
than at home ; and private motives here coincide 



ON MONEY. 257 

with public welfare, since what the traders do in 
transporting gold and silver, with an eye to their 
own interest, helps maintain at home and abroad 
the steady value of these commodities. This law of 
the distribution of the precious metals by commerce, 
and the equilibrium of value resulting therefrom, is 
as natural and beautiful as the law which preserves 
the level of the ocean, or that which balances the 
bodies of the planetary system. This has come at 
length to be recognized by the nations, and the laws 
which used to forbid by heavy penalties the expor- 
tation of gold and silver are all swept away, and 
these metals are now free to go, and do actually go, 
where they can obtain the most in exchange. It is 
absurd to suppose that their owners would carry 
them out of a country, unless they were worth more 
abroad than at home, and therefore the prejudice 
which exists still in this country against the expor- 
tation of gold is a senseless prejudice. The gold is 
not given away ; it is sold, and sold for more than it 
will buy at home ; otherwise it would not be carried 
abroad. There is the same kind of gain as in all 
other exchanges, and this great incidental advantage 
in addition, that, by means of free commerce in the 
precious metals, their general value is kept pretty 
uniform throughout the world, and a chance redun- 
dancy in one currency is drawn off to supply a cor- 
responding deficiency in another. It may be laid 
down as an axiom, that no country will export, for 
the sake of getting other things, those things which 
are more needful for its own welfare ; and there 
need not be the slightest fear that any nation which 
cultivates its own advantages under freedom will 

17 



258 ELEMENTS OF POLITICAL ECONOMY. 

ever lack a sufficient quantum of the precious metals. 
Under freedom, and so long as human nature con- 
tinues what it is, these metals will go, and go in just 
the right proportions, to and from those countries 
which produce and offer in exchange those desirable 
services which other countries want. The greater 
the enterprise and skill, the keener the development 
of all peculiar and presently available resources, the 
more honorable and free the commercial system, the 
surer is any nation, whether it be a gold-bearing 
country or not, of securing the gold and silver which 
it needs. This is so, because there will be a good 
market to buy in, and they who have gold will 
resort thither to buy. But such a nation will also 
want to buy other things besides gold and silver, and 
when enough of the latter are secured for the cur- 
rency and for the arts, the residue will be exported, 
perhaps to the very countries from which it orig- 
inally came, in payment for some products which 
those countries have an advantage in producing. 
The United States is a gold-producing country, and 
exported in the years 1850 — 1860, both inclusive, 
$502,789,759, coin and bullion ; and during the 
same period we imported from other countries 
$81,270,571, coin and bullion.^ Now, there was a 
double advantage in that exportation. In the first 
place, more and better commodities were secured to 
the country than tne gold could have bought in the 
country, for otherwise it would not nave been earned 
abroad ; and, in the second place, this large sum car- 
ried abroad to various countries in exchange, not 
only prevented the disturbing effect on our own cur- 

1 Report on the Finances, 1863. 



ON MONEY. 259 

rency of more than doubling in ten years' time our 
stock of gold, thus inevitably depreciating the whole 
mass, but also, by causing the new gold to impinge 
on the whole world's stock instead of on the cur- 
rency of a single nation, the shock of the new pro- 
duction on the measure of value, though perceptible, 
was reduced and deadened. The world's mass of 
the precious metals is comparatively torpid beneath 
the action of an accretion which would break down 
by its weight the currency of a single nation. There- 
fore, the fluency of gold and silver, by which they 
pass easily in commerce to those places where their 
present value in exchange is greatest, and return as 
easily when the conditions are reversed, tends pow- 
erfully to make their general value uniform through- 
out the world, and consequently to make them the 
best medium of exchange and the best measure of 
value. 

(e.) On account of this circumstance, that every 
general rise or fall in the value of gold and silver 
tends to check itself. This principle, indeed, is ap- 
plicable to the value of all commodities, but owing 
to their quantity and durability preeminently appli- 
cable to the value of the precious metals. The check 
is double in either direction. First, let us suppose 
that the purchasing-power of an ounce of gold or 
silver be rising : then, production will be stimulated 
at all the mines, and the more stimulated as the rise 
is more, and the new and enlarged supply will tend 
to check a farther rise, and, unless the permanent de- 
mand has been intensified, to bring back the value 
to the old point ; moreover, when there is a rise in 
the value of the coin, there is a less quantity required 



260 ELEMENTS OF POLITICAL ECONOMT. 

to do the same amount of business, and the demand 
for gold which causes the rise tends to be checked 
by the rise itself, because a less quantity is needed 
in the currency in consequence of the rise. This 
supposes, of course, that the exchanges mediated by 
money are no greater than before. Thus a rise of 
value in gold and silver checks itself by natural 
laws in two ways. Just so of a fall in their value. 
Production is thereby slackened at the mines, and 
the lessened supply tends to enhance value ; and, if 
the same business is to be done as before, there is a 
stronger demand for currency while the fall con- 
tinues, and this demand tends also to restore the 
value. All this is in the interest of a steady value. 

(/.) On account, lastly, of this circumstance, that 
a stronger demand for currency is met either by 
increasing the stock of coin, or by an increased 
rapidity of circulation of that on hand. A brisker 
demand for money, especially if it be temporary, 
does not necessarily enlarge the supply, or alter the 
value, but only hurry round the existing circulation. 
Oscillations in the demand are responded to by a 
slower or more rapid circulation. This tends most 
admirably to keep the value steady within certain 
limits. When enterprises are multiplying and ex- 
changes are being permanently increased in number 
and variety, then there must be a larger amount of 
money, and this larger amount is secured in the 
ways already indicated, with perhaps slight disturb- 
ances of value ; but the temporary ebbs and flows 
of business have no effect . at all on the mass of 
money, but only on its movement, and its value con- 
sequently is not disturbed at all. 



ON MONEY. 261 

These six grounds appear to be satisfactory and 
sufficient to account for the superior steadiness of 
the value of gold and silver, so far as their value is 
determined by considerations relating to the metals 
themselves. We now proceed to the reasons addi- 
tional to this why gold and silver constitute the 
best money. 

(2.) Because they are self - regulating". These 
metals came to be, and continue to be^ money, 
independent of the enactments of any government. 
Government indeed coins them for the use of the 
people ; but coinage is nothing in the world but a 
public attest to the quantity and quality of the metal 
contained in the coin. For the trouble and expense 
of assaying, stamping, and thus attesting the quan- 
tity and quality of the metal in the coin, govern- 
ments usually charge the depositors of bullion a 
small seigniorage ; England indeed does not ; and 
the United States did not till 1853 ; but at presentj 
France and the United States charge respectively 
on gold coins, .216 per centum and .5 per centum ; 
so that a very insignificant part of the value of 
coins is due to the process of coining. The value 
of coined money regulates itself on just the same 
principles as the value of wheat regulates itself, and 
governments are as powerless to alter the one as the 
other. Indeed, the coining of either metal by itself 
is a matter of quantity and quality alone, and not a 
matter of value at all : the United States say by 
law that a gold dollar shall consist of 25f grains 
troy, of which nine parts shall be pure and one 
part alloy, but of the value of this dollar thus 
coined the law says nothing. It can say nothing. 



262 ELEMENTS OF POLITICAL ECONOMY. 

The coin is publicly attested so heavy, so fine, and 
thereafter it takes its chance as to value. All gov- 
ernments have nowf learned, after oft-repeated and 
always vain trials to regulate the value of their coins, 
that all they can do is to regulate the amount and 
fineness of the metals contained in them. When, 
however, it is designed that both metals shall circu- 
late in the same currency, then it becomes necessary 
that government shall determine, as well as it can, 
not the absolute value of either, but the relative 
value of each in each. And here too the value of 
each, estimated in the other, regulates itself inde- 
pendently of edicts or enactments. If the legislators 
can ascertain in what proportions they are exchang- 
ing for each other in a free market, they may mark 
that as the legal relative value of the two, but they 
must not suppose that their work will not require 
revision from time to time. 

The value of gold in silver has differed consider- 
ably in different periods and countries. Livy men- 
tions that the relative value was 1 to 10 about 189 
B. c.; Julius Caesar is said by Suetonius to have 
exchanged the two on one occasion at 1 for 9 ; under 
the early Roman emperors, it was 1 for 12 ; from 
Constantine to Justinian, about 1 for 14. Herodo- 
tus mentions it as 1 to 13 in Greece, in his day, 
which was the fifth century before Christ ; Plato, a 
little later, calls it 1 to 12. In England, before the 
discovery of America, it was about 1 to 10 ; in 1717 
the last legal rating of the two put them at 1 for 
15i, although Sir Isaac Newton, in his report to 
Parliament that year as master of the mint, shows 
tlje iuarket rate was nearly ] for 15|. At that time, 



ON MONEY. 263 

the rate in France and Holland was 1 to 14|, which 
of course made it profitable to export silver from 
England to the Continent. In China, Japan, and the 
East Indies generally, gold has always been cheap 
relatively to silver (in Japan, till 1860, as 1 to 4, 
since then as 1 to 13^), which accounts for the 
stream of silver perpetually flowing from Occident 
to Orient. In 1792, when the mint of the United ^ 
States was established, the legal rate of exchange 
for the two metals was fixed at 1 for 15, which 
proved to be an undervaluation of gold, and tended 
to drive the gold coins abroad. Mr. Elliott, of the 
U. S. Bureau of Statistics, has shown that the aver- 
age for the thirty years just prior to the discovery 
of the new gold fields was 1 to 15j ; that after the 
opening of these fields in 1848-50, gold gradually 
fell, reaching its minimum of 1 to 15i in 1859; and 
that since it has slowly advanced to 1 for 15^, the 
point it now holds. This law of self-regulation, 
maintaining itself in spite of all legal enactments, 
led England in 1816, and the United States in 1853, 
to abandon a double standard of value, and prac- 
tically demonetize silver by degrading the coins in 
weight, so that they pass current at more than six 
per cent, above their real value. English silver coins 
are degraded 6^% per cent.; United States smaller 
silver coins are 6{y per cent, less than silver dollars ; 
and consequently, they are only legal tender in the 
two countries respectively for 40 shillings and $5.00. 
The Bank of England is only allowed to hold silver 
as the basis of circulation to the extent of one fourth 
of the gold coin and bullion held at any one time ; 
yet silver maintains its own value in spite of these 



264 ELEBIENTS OF POLITICAL ECONOMY. 

disadvantages, and is thought to comprise about one 
fifth of the whole metallic circulation of the realm. 

It is convenient to have at least two metals in the 
currency, notwithstanding the impossibility of main- 
taining a steady legal relative valuation between 
them. Gold ought to be exclusively the standard; 
it ought to be the only legal tender for large sums ; 
but silver coins are useful for the lesser exchanges, 
and there is no present objection to their being de- 
based in weight so as to allow a considerable change 
in the market value of gold in silver without tend- 
ing to export the silver coins. Another reason for 
the use of both silver and gold in the coinage is the 
increased stability in value thereby secured to the 
whole currency. The immense quantity in the world 
of both metals combined, and the opportunity of re- 
plenishing a chance deficiency of the one from the 
stores of the other, give, in accordance with princi- 
ples already explained, a superior stability to value. 
Most currencies, our own included, have also a third 
metal or mixture of metals, to serve the purposes of 
the smallest exchanges, and the coins made of this 
are usually largely overvalued — our nickel cents of 
1857 cost the government about half a cent each — 
and are not legal tender for debts except for very 
small sums. 

It is, then, a principal merit of metallic currencies, 
that the gold and silver comprised in them determine 
their own value by natural laws, both relatively to 
each other and to all other purchasable things ; and 
hence the quantity required in each currency of the 
world to do the business of that country is a matte 
which natural laws are perfectly competent to regu- 



ON MONEY. 265 

late, without any direct action of government ; and 
governments may be relieved from the difficult or 
rather impossible task of determining how much 
money their country shall have. The distribution 
of the precious metals over the earth by commerce, 
according to the wants and circumstances of each 
country, is not perfectly accomplished at present by 
the natural laws which are competent thus to dis- 
tribute them, because some of the nations use still 
some form of credit as a part of their current money, 
and also because alLthe nations have not yet come 
to an agreement as to the degree of fineness of 
the metals used in their respective coinage. These 
obstacles impede somewhat at present the action of 
the comprehensive laws which will one day be 
allowed to control this matter perfectly. Nature 
herself has made the first grand provision for the 
self-regulation of the money of the world, by making 
pure gold and silver of exactly the same quality all 
over the wide earth. No matter where it is mined, 
or when, gold is gold and silver is silver. The gold 
mined to-day in California differs in no essential 
respect from the gold used by Solomon in the con- 
struction of the Temple. So that, if the commercial 
nations would co^e to a common agreement as to 
the amount of alloy they will put into their corns, 
and then bring these coins, as might easily be done, 
into decimal or other easy numerical relations with 
each other, it would be a matter of indifference to 
every nation whether the coins circulating thereiji 
were exclusively national coins or not. Foreign 
coins, to the extent to which commerce would natu- 
rally bring them there, would have just the same 



2G6 ELEMENTS OF POLITICAL ECONOMY. 

circulation and credit as their own : there would not 
be, as now, the trouble and expense of melting up 
and recoinage ; the balances of trade could be paid 
indifferently in any coinage, and, as we shall soon 
see, every nation would secure without friction or 
legal enactment its due proportion of the money of 
the world. We are not now so far removed from 
this state of things as might at first sight be sup- 
posed. 

The French plan of a universal coinage was devel- 
oped at an international monetary conference held 
in Paris during the Great Exposition of 1867. This 
plan proposes, (1) a single standard exclusively of 
gold ; (2) coins of equal weight and diameter ; (3) 
of equal quality nine tenths fine ; (4) the weight of 
the five franc gold piece, 1612.9 milligrams, to be 
the universal unit; (5) the multiples of this unit to 
be decimal, or at least divisible by 5; (6) the coins 
of each nation to bear the names and emblems pre- 
ferred by each, but to be legal tender in all. France, 
Belgium, Switzerland, Italy, and Greece, numbering 
in all 72,000,000 souls, have now a common money 
based on the French franc. It is claimed that- no 
other plan requires so few changes and so little ex- 
pense to unify the money of the ^orld, and that the 
nations already using the French unit have more 
coined gold than the aggregate of the coined gold 
of those nations asked to conform to this plan.^ On 
the other hand, the objections to it are, (1) the ugly 
fraction in the unit of weight ; (2) England's prefer- 
ence of her old standard of \h fine to a, fine ; (3) 
both American and British gold would have to be 

1 Report of S. B. Iluggles to the De]iaitment of State. Mr. Euggles 
tvas a delegate to, and evidently a leading mind in, the conference. 



ON MONEY. 267 

recoined ; and (4) the system is not decimal through- 
out, the napoleon of 20 francs not being decimally 
related to the franc. 

Mr. E. B. Elliott of the U. S. Treasury Depart- 
ment has proposed another plan of unification, in 
which all the coins are to bear simple relations to 
the metrical gram. By persuading Great Britain 
to coin 1% fine, by reducing the weight of fine gold 
in our dollar from 1.5046 -{- grams to 1.5 grams, by 
increasing the fine gold in the pound sterling from 
7.3223 -[- grams to 7.5 grams, and by increasing the 
weight of the napoleon from 5.8064 -|- grams to 6 
grams fine gold, their weights, both fine and stand- 
ard, would all be strictly metrical, and bear simple 
relations to each other. The following equivalents 
would obtain, namely, 4 pounds = 20 dollars = 100 
francs. Each of these would weigh 30 grams fine 
gold, or 32^ grams standard gold. Also, 1 dollar =: 
5 francs = 50 pence, each weighing 1| grams fine, 
or If grams standard. Also 1 pound = 5 dollars, 
each 7i grams fine, S^ grams standard. 

In the mean time Germany and Austria have de- 
veloped each a new coinage of their own, and have 
perhaps thereby postponed the exact unification of 
the money of the. commercial world. The new Ger- 
man unit is the mark containing 100 pfennigs. A 
kilogram of pure gold is cut into 279 of the new 
10-mark pieces, so that a mark is equal to 23.821 
cents United States gold, as a gram equals 15.432 -\- 
grains troy. The new Austrian florin is very nearly 
48 cents of our gold, or 2 shillings English ; since 
one English shilling equals 24|{]i} of our cents, and 
an English penny equals 2q^^jjV cents. 



268 ELEMENTS OF POLITICAL ECONOMY. 

Now, though the Bank of England circulates a 
paper nfioney partly based on government credit, 
tlfouiih the United States has under the national 
banking law a similar paper money, and though 
Germany is to have some national paper in connec- 
tion with the new metallic money ; yet, every pound 
or dollar or mark of this paper money is or is to 
be redeemable in gold and silver; and, as the ratio 
of paper to specie in Great Britain is the ratio of 
£45,000,009 to X80,000,000, as a still smaller ratio 
is likely to prevail in Germany, and as it is earnestly 
to be hoped that the United States will ultimately 
have at least as much of specie as of paper money, 
the maintenance of such paper for the home circula- 
tion may or may not be sound financial policy, but 
it is evident that it cannot, under these circum- 
stances, substantially interfere with the self-regu- 
lation of the metallic money of the world. Never- 
theless, that we may see with distinctness the 
scope and efficiency of the magnificent natural 
law which distributes the precious metals over the 
earth in accordance with the business-wants of 
each nation, let us suppose that there were no 
paper money ; that all the nations minted their met- 
als with a common proportion of alloy; and that 
the real relative value of the two were ascertained 
by law in the countries where both are legal tender, 
and were well understood also in the other coun- 
tries. In this case there would be no motive to 
debase any part of the coinage to prevent its expor- 
tation, and all the money of all the nations would 
be value-money purely. Now then, money is the 
medium of exchange, and is wanted where the ex- 



ON MONEY. 269 

changes are, and not elsewhere, and goes of neces- 
sity under freedom whither it is relatively most 
wanted, that is to say, whither the most can be 
obtained for it in exchange. If the country be gold- 
bearing, and its people at the same time be enter- 
prising in the production of all sorts of services for 
exchange among themselves, they will retain enough 
of their own gold to mediate their own exchanges, 
for the simple reason that they want it, and have 
services to offer in exchange for it ; and if they have 
been allowed in freedom to develop their own pecu- 
liar advantages, no foreign nation can outbid them 
in the offers they are able to make for a sufficient 
quantity of this gold. If foreigners draw away the 
gold from them, it shows that the home people have 
less industry and less skill to produce those things 
which the gold-producers want. The home people 
have the advantage in one respect. They are on the 
spot. There is less expense to them than to foreign- 
ers in transporting the services offered in exchange 
for the gold, and also the gold received in return. 
If, with this advantage, foreigners can still outbid 
them in offers for the gold, it shows that they need 
it most and deserve it most, since they have had the 
industry and the skill to produce that which is pre- 
ferred by the miners to the home services offered, 
and have also overcome an additional obstacle. The 
gold producer, like every other producer, has the 
right to get the most he can for his service. Who- 
ever can offer him that most has the best right to 
the gold. Therefore the gold goes in the first in- 
stance into their hands, whether natives or foreign- 
ers, who offer the most for it in exchange. If the 



270 ELEMENTS OF POLITICAL ECONOMY. 

people of the gold-bearing country have equal natu- 
ral advantages with others to produce those things 
which are wanted in exchange for their gold by 
those who practically work the mines, and then fail 
to get the gold they need, the blame lies nowhere 
except on their lack of industry and skill. Let not 
such people think to find any shelter behind natural 
laws. Natural laws are justly and eternally against 
them. If, however, they are naturally placed at a 
disadvantage in respect to those specific products in 
demand by the first owners of the gold, they are 
then brought into the same category with non-gold- 
bearing countries. They will then get their gold at 
second hand, and if they deserve it, will be just as 
sure to get it as if they retained it in the first in- 
stance. Every nation has natural advantages in 
some sorts of products. Just so soon as these are 
properly developed, it has some things to offer to the 
world at a better rate than anybody else can offer 
them. Thither, and to buy those things, will gold 
flow, if not directly from the gold- producing lands, 
then indirectly but inevitably, from those lands 
where the gold at present is. Under our supposi- 
tion, it makes no difference where the gold came 
from, or what nation minted it, it is drawn by a 
natural force not to be resisted to that people, 
which", by offering services in general demand, re- 
quires gold to mediate the exchange of those ser- 
vices. Thus, by a law as unerring as gravitation, 
the precious metals make the circuit of the earth, 
abiding certainly in large masses within all the com- 
mercial nations, because there is where they are con- 
stantly wanted and cannot be spared, but passing 



ON MONEY. 271 

urt also perpetually in smaller masses from all the 
groat centres of business towards those points where 
their purchasing-power for the time being is greater 
than at home. The one only impulse thai can stir 
the precious metals from their usual haunts, is the 
belief that elsewhere they are worth more in ex- 
changes ; and hence, just as soon as the demand 
for a currency is fairly met in any country by the 
presence of gold and silver, coin ceases to flow 
thither as a permanent thing, but rather ebbs and 
flows in obedience to the ever-shifting exigencies of 
trade. The nation that does a large business will 
require a large stock of coin, will be able to pay for 
it, and will inevitably secure it; a nation with fewer 
exchanges to make will less need the instrument 
with which exchanges are made, will buy and keep 
a less quantity; and if, in the chances of trade, 
more comes than is needed, it flows off at once to 
the places where the demand for it is stronger ; and 
thus the proportionate amount due to the commer- 
cial interests of every nation goes thither under a 
natural law, and abides there under a natural law. 
Hence the general purchasing-power of gold and 
silver tends steadily to an equality the world over. 
If it be appreciably higher in one nation than in 
the others, the metals are drawn toward that nation 
by an irresistible attraction till the equilibrium is re- 
stored. Add to this, that there is at all times a vast 
reservoir of plate from which any sudden or steady 
demand for currency can easily be supplied, and in- 
to which any fortuitous or steady superfluity can 
as readily be drained, and the reasons are apparent 
why gold and silver currencies are self-regulating in 



ii72 ELEMENTS OF POLITICAL ECONOMY. 

value and amount. If, on the other hand, a cur« 
rency is to be of paper, independent of gold and 
silver, there is no self-regulation about it : we pass 
at once from the region of natural laws into the 
region of statute and enactment ; somebody must 
take upon themselves to decide how much of thi.s 
paper there shall be, — a power which could not be 
lodged in more dangerous hands than in those which 
thought themselves competent to exercise it. 

(3.) Because they are conveniently portable, divis- 
ible, and vnpressible. Our proposition is, that gold 
and silver constitute the best money; and in proof 
of this we have already demonstrated the steadiness 
of their value, and their self-regulating power ; inci- 
dental to these great advantages are the material 
qualities of these metals, by which they are admi- 
rably fitted to be the money of the nations. Their 
weight is little relatively to their value. A thousand 
dollars in gold are not indeed carried so easily as a 
bill of exchange or a bank-note ; and expedients are 
easily adopted, and always have been used, by 
which the transfer in place of large masses of coin 
is for the most part obviated ; and our proposition 
does not deprecate at all the use of the economiz- 
ing expedients of commerce ; but for the money of 
the people, for the currency that passes from hand 
to hand in ordinary exchanges, we maintain that 
gold and silver are sufficiently portable. One troy 
pound of English sovereigns, which one can put in 
a glove-finger and carry in his vest-pocket, almost 
without knowing it, is worth about $230; and the 
experience of those countries, like France and Ger- 
many at present, where the money is mostly metallic, 



ON MONEY. 273 

has not pronounced it onerous on account of its 
weight. At any rate, it is better to accept all the 
other immense advantages of gold and silver money, 
together v^^ith a little inconvenience as to weight, if 
one chooses to insist on that, than to adopt substi- 
tutes every way inferior as money, except that they 
are lighter in our purses. 

Moreover, gold and silver differ from jewels, and 
most other precious things, in that masses of them 
are divisible, without any loss of value, into pieces 
of any required size. The aggregate of pieces ia 
worth as much as the mass, and the mass as much 
as the pieces. For currency purposes this is a great 
advantage. For its utmost convenience, business 
requires a considerable variety of coins, and if any 
of these kinds be minted in quantity in excess of 
the demand, nothing more is required than to remint 
them in other denominations, and their whole value 
is saved to the currency in the most convenient 
form. It is this quality which enables coins to flow 
into plate whenever the metal in them becomes 
more valuable in the form of plate, and plate again 
to flow back into coins whenever the metal in it is 
more in demand as coin. 

Lastly, these metals are capable of receiving and 
retaining any stamp which government chooses to 
impress upon them. A certain proportion of alloy, 
say tV, hardens them to such a degree that they ex- 
hibit with sharp distinctness the cut of the die, and 
permanently retain its impress. This quality of the 
metals, when they are skilfully coined by the im- 
proved machinery of modern times, makes the 
piece? of money objects of beauty, and practically 



274 ELEMENTS OF POLITICAL ECONOMY. 

indestructible also^ since the perfect circular form, 
the device covering the whole piece, the milled and 
fluted edges, make clipping without detection im- 
possible, while the hardness of the pieces makes the 
annual loss of weight by abrasion scarcely appre- 
ciable. The Director of the United States Mint, in 
his Report for 1862, gives the results of some care- 
ful and comprehensive experiments made at the 
mint to ascertain the yearly loss of coins by the 
ordinary wear and tear of circulation. These re- 
sults are exceedingly interesting and important, and 
throw to the winds the haphazard conjectures of a 
host of writers on either side of the Atlantic. On 
our silver coins, taken promiscuously, the average 
annual loss from abrasion was ascertained to be 
one part in 630 ; while the gold coins were tested 
separately, with this satisfactory conclusion, that the 
half-eagle averages a loss per annum of one part in 
3550, the double-eagle one in 9000 ; and a cautious 
estimate as to the proportions of the various sizes 
of coin actually in circulation in the United States, 
made of the two metals, leads consequently to the 
conviction that the average yearly waste by wear on 
all the coins does not exceed one part in 2400. The 
cost, therefore, of maintaining a metallic circulation 
is by no means so great as it has been usually repre- 
sented. An instrument in constant use that requires 
only ^:^Q of its value for its yearly repair, and per- 
forms exceeding well the most delicate and impor- 
tant functions, is a cheap and durable instrument. 

From these three main reasons, we conclude that 
gold and silver are the best money. 



ON MONEY. 275 

4. An inferior money, so long as it circulates at all, 
invariably drives a superior money out of the circula- 
tion. 

This is a fundamental law of finance, and has 
been illustrated over and over again in every age and 
nation. It is as solid as the substance of truth can 
make it, though it looks at first sight like a paradox. 
We naturally think that what is excellent tends 
rather to displace what is inferior, but with money 
the exact reverse is the law, and the perfect coin of 
full weight, instead of driving out the light and the 
debased pieces, is always itself driven out of the 
circulation by them. The reason is obvious from 
the nature of money. Money is merely an instru- 
ment of exchange, and nobody wants it except to 
buy with, and so long as the government and the 
community treat light coin and full coin as of equal 
value, receiving them indifferently in payment of 
debts and of taxes, it is clear that nobody will give 
in payment of debts and of taxes that which is really 
worth more so long as that which is really worth less 
will go just as far. The inferior pieces will abide in 
a market where they will fetch just as much as the 
superior pieces, while the superior pieces will take 
on a form or migrate to a place in which some 
advantage can be gained from their superiority. 
Thrown into the crucible, or exported in commerce, 
this superiority immediately manifests itself; and 
therefore into the crucible or into the channels of 
foreign trade it might be confidently predicted before- 
hand that such money would be thrown, and all ex- 
perience testifies with one voice that exactly those 
are the destinations of such money. Mr. Macaulay, 



276 ELEMENTS OF POLITICAL ECONOMY. 

in the twenty-first chapter of his history, mentions 
that Aristophanes, the Greek eomic poet, in the fifth 
century before Christ, was the first writer who has 
noticed the fact that where good money and bad 
money are thrown in together the bad money drives 
out the good. The verses of the poet allude to the 
tendency as well known, and refer it to the naturally 
depraved taste of his fellow-citizens, like that which 
led them to entrust state affairs to such men as 
Cleon, whom he was satirizing ; but, in truth, as we 
have seen, the tendency results from the common 
sense of men, which revolts at the idea of using a 
dearer instrument when a cheaper one will answer 
just the same purpose. 

Out of a crowd of good illustrations of this law, 1 
shall first select two which occurred in purely metal- 
lic currencies. The Dutch city of Amsterdam be- 
came in the seventeenth century a centre of trade 
for all Europe. The mercantile honor and solid 
financial ability of its merchants was proverbial all 
over the world; and yet it was noticed, about the 
year 1609, that bills of exchange on Amsterdam 
were always below par in other countries. The 
merchants had never failed to meet all the paper 
drawn on them with the utmost promptness, and the 
discount on this paper in other markets was a won- 
der to" everybody. On search, however, it was found 
that the cause of all this was in the currency of the 
city. The extensive trade of Amsterdam brought 
into it large quantities of dipt and worn foreign coin, 
which circulated in the currency of the city, and 
reduced its value about nine per cent, below that of 
good money fresh from the mint. It was noticed, 



ON MONEY. 277 

that the good money of full weight which the mint 
of Amsterdam poured into the circulation by wagon- 
loads, did not stay in the circulation ; that very few 
of such pieces were told out in the daily exchanges ; 
it was ascertained that they were melted up, or 
carried away to other countries, in either of which 
cases their value corresponded to the value due to 
their weight and fineness, while at home in the cur- 
rency their value only corresponded to the average 
value of the depreciated coins which constituted the 
bulk of the circulation. Bills of exchange, conse- 
quently, drawn on Amsterdam were liable to be 
paid in this depreciated coin, and the exchange was 
against the city even more than the coin was depre- 
ciated ; because, the currency in such an uncertain 
state was naturally valued abroad even below what 
it was really worth. To meet this state of things, 
and bring up its exchanges to par, the city of Am- 
sterdam, in 1609, established its celebrated bank. 
The bank received the dipt and worn coin which 
was circulating in the city, at its true value accord- 
ing to present weight and fineness, and after deduct- 
ing a small charge for expense of recoining, and 
another small charge for management, gave a credit 
on its books for the remainder. This credit was 
called bank-money; it represented, guilder for guilder, 
money actually in deposit, and money too exactly 
according to the standard of the mint. The city 
ordered that all bills drawn on Amsterdam of more 
than six hundred guilders' value, should be paid in 
bank-money ; thus every considerable merchant was 
obliged to open an account with the bank, and make 
his deposit. This instantly took away all uncertainty 



278 ELEMENTS OF POLITICAL ECONOMY. 

ftom bills of exchange drawn on Amsterdam. They 
went up to par at once in every market in Europe. 
This was the basis of the simple and beneficent 
operations of the Bank of Amsterdam, an institution 
which enjoyed unlimited credit in the commercial 
world for nearly two hundred years. The conven- 
ience of this bank-money ; its unvarying character; its 
security from fire, robbery, and other accidents ; the 
fact that the city was bound for it ; and the demand 
for it occasioned by the fact that every merchant 
must have some of it, that is, must keep an account 
with the bank, in order to pay his foreign bills of 
exchange, gave the certificate of deposit, or the bank- 
money, a constant premium of about five per cent, 
over the good coin of full weight which came into 
circulation without difficulty as soon as the poorer 
coins were drawn into the bank for recoinage. 

At the close of the same century, a similar series 
of events occurred on a much larger scale in Eng- 
land.i The old silver coinage of England was by a 
rude process introduced into that country by artists 
from Florence as early as the thirteenth century. 
The pieces were shaped and stamped by the hammer. 
They contained some a little less and some a little 
more than the due amount of silver ; few of them 
were perfectly circular ; the edges were neither milled 
nor fluted ; the image of the sovereign occupied the 
centre of the pieces, and the superscription ran around 
the edge, but not so near it as that the letters were 
necessarily impaired by a little clipping. Conse- 
quently it was easy to pare off a pennyworth or two 
of silver from the crowns, half-crowns, and shillings, 

1 Macaulay's History, Cbap. 21. 



ON MONEY. 279 

and then pass them along. It became a profitable 
branch of industry. It was in vain that Elizabeth 
enacted that the clipper should be henceforth liable 
to the penalties of high treason. About the time of 
the Restoration, that is, about 1660, it was noticed 
that a large proportion of the silver coin of the 
realm had undergone some, degree of mutilation. 
At that time a new process of coinage was brought 
in. A mill worked by horses fabricated the new 
coins on better principles. They were exactly round, 
and the edges were inscribed with a legend, and they 
were all of just and equal weight. They were 
thrown out into the circulation to pass current with 
the hammered money, and it seems to have been 
expected that they would soon come to displace it. 
But they did not. Both were received at first with- 
out distinction by the individual traders and by the 
public tax-gatherers. But it was not long before the 
milled money was noticed to be scarce. One "hardly 
saw a piece of it in a fortnight. The horses at the 
mint were all the tinie tugging away, and the bags 
of fresh money were carried continually from London 
Tower to London town, but the new money never- 
theless became scarcer every day. In the payments 
made at the Treasury not one piece in two hundred 
was milled silver, and a merchant complained that, 
being paid a debt of thirty-five pounds, he only got 
one half-crown of good money. Indeed, the money 
was getting perpetually worse. False coiners mul- 
tiplied, and clippers abounded more and more. The 
penalties of an extreme law were utterly powerless 
to restrain the mutilation of the coins; until, at length, 
public opinion decidedly turned against the promis- 



280 ELEMENTS OF POLITICAL ECONOMY. 

<^uous hanging of clippers ; officers were reluctant to 
arrest, and juries reluctant to convict, and the people 
sympathized with the sufferers as only guilty of a 
moderate fault. Thus things went on till 1695. 
The lighter the old coins became, the scarcer became 
the new ones; for who would pay two ounces of 
silver when one ounce was legal tender? The new 
money was melted, was exported, was hoarded, but 
circulate it would not. At length the lightest pieces 
began to be refused by some people, and other peo- 
ple demanded that their silver should be paid to them 
by weight and not by tale, and there was wrangling 
over every counter, and a dispute at every settlement, 
and the coin was really so diverse in its value that 
there was no longer any measure of value in the 
kingdom ; business was in utmost confusion, society 
was by the ears, poor people were unmercifully 
fleeced, and shrewd ones grew enormously rich ; 
and the Jacobites secretly exulted in the hope of 
being able to avail themselves of the prevailing dis- 
content to overthrow the scarcely established revolu- 
tionary government of William and Mary ; when, 
by the joint counsels of two such philosophers as 
Locke and Newton, and two such statesmen as 
Somers and Montague, the government took the 
bold resolution of recoining all the silver of the king- 
dom. - An early day was fixed by Parliament, after 
which no clipped money could pass except in pay- 
ments to government, and a later day after which it 
could not pass at all. It was wisely determined that 
the loss on the clipped money should be borne by the 
whole public, and not by the present holders of it ; 
and it was estimated that .£1,2005000 would be re- 



ON MONEY. 281 

quired to make up the currency to the old standard 
of weight and fineness ; and this sum the Bank of 
England, just established, was willing to advance 
on the security of some new and good tax ; and the 
window-tax was passed to raise the money ; the old 
coins were rapidly drawn in, melted up, and re- 
coined, and thereafter there was no difficulty in 
keeping the circulation full of milled pieces of full 
weight. 

In mixed currencies, the financial law we are now 
treating has a similar, but if possible a more disas- 
trous operation. K the paper in cnrculation be not 
nominally redeemable in gold and silver, then as 
soon as it depreciates below the value of gold and 
silver, as such paper has never yet failed to depreci- 
ate in a short time, it drives the metals completely 
out of the circulation, and keeps them out just so 
long as itself circulates, or until the quantity of such 
paper is so reduced and its character so improved 
that it rises again to a par value with the metals, in 
which case, though it has never to my knowledge 
actually occun-ed, the metals would come back into 
the currency alongside of the paper. The sudden- 
ness and the thoroughness with which the gold and 
silver will abandon a currency of which a depreci- 
ated, irredeemable paper forms a part, was illustrated 
on a large scale in this country in 1862. A gigantic 
civilwar had been in progress in the nation for a 
year ; difficulties and disasters had thickened around 
the path of the government ; its financial embarrass- 
ments were of the most formidable kind ; and yet, 
until April of that year, 1862, the paper money of the 
loyal States, which consisted of about $140,000,000 



282 ELEMENTS OF POLITICAL ECONOMY. 

of bills of the various State banks, had not much 
depreciated as compared with coin. In January, 
indeed, when the national government had added to 
this mass of paper about $30,000,000 of demand- 
notes gold was at a premium of five per cent. ; but 
as soon as the law authorizing the issue of national 
legal-tender notes was passed, the government drew 
in the demand-notes, and for a little interval the 
paper currency was reduced to about f 140,000,000, 
and on the first day of April, when the legal-tenders 
were ready for circulation but not yet issued, the 
coin bore a premium of about one per cent. It had 
not yet in any sense abandoned the circulation. The 
State banks had all suspended specie payments on 
the last day of the preceding year, but had not yet 
much expanded their usual circulation. And now 
it is to be noticed that the steady depreciation of the 
paper currency of the country, both state and national, 
commenced at the very time when the national legal- 
tender notes were thrown into the circulation. All 
the paper was now irredeemable, and its volume was 
now expanded, and the depreciation began ; it was 
liable to still further expansion, both from the absence 
of restraint on the circulation of the State banks and 
from the urgent necessities of government leading to 
the issue of more legal-tenders, and the depreciation 
continued. In May gold bore three per cent., June 
nine per cent., July fifteen per cent, September twen- 
ty-one per cent, October twenty-nine per cent, and 
December thirty-two per cent. Step by step, as the 
volume of the currency increased, did its value de- 
crease as compared with gold ; and what is more to 
the present purpose, no sooner did the depreciation 



ON MONET. 283 

become sensible, than the scarcity of coin became 
sensible also, and in a very few weeks' time the 
currency was swept utterly bare of metallic money. 
The gold went first, and then the silver ; and a little 
later even the copper cents followed the example ; 
and the government was obliged to authorize the 
use of its postage and revenue stamps for small 
change ; and, until it was prohibited by law, cities, 
corporations, and individuals issued shinplasters and 
metal tokens of various kinds to take the place of 
the small coins. This present writing is at the au- 
tumnal equinox of 1873, but with the exception of a 
few copper pieces, the coins have not yet returned to 
the circulation, for the sufficient reason that the paper- 
money is still depreciated as compared with them. 
The war is over, peace has returned, business is re- 
viving, and a career of unprecedented prosperity is 
opening up before the country, but the coins have 
not come back, and, under the commonest principles 
of human nature, cannot come back, until the paper 
dollar of the country is equal in purchasing-power to 
the gold dollar, and is redeemable in that. Since 
April 1st, 1862, the paper money has varied from 
less than one to sixty-five per cent, below par, and 
is to-day thirteen per cent, below par. 

So long as the paper money of a country is nomi- 
nally redeemable in gold and silver, the operation of 
the law we have in hand is somewhat peculiar. In 
times of ordinary confidence and prosperity the paper 
and the coin circulate indifferently together, and 
an undue increase of the paper beyond the just de- 
mands of business does not indicate itself in a pre- 
mium on the coin, but each part of the whole cur- 



284 ELEMENTS OF POLITICAL ECONOMY. 

rency suffers a diminution in value, which is of course 
indicated in a general rise of prices. There is noth- 
ing anonaalous in this, for increase of supply, other 
things as before, always lowers the value of any- 
thing; and the direct interest of the parties who 
furnish the paper leads them to increase their circu- 
lation as much as they fairly, and sometimes as 
much as they unfairly, can. But a market in which 
prices are high and gold is still circulating is a good 
market to sell in, and increased importations never 
fail to accompany a rise of prices caused by the de- 
preciation of a mixed currency. In the home market 
the paper is still as good as gold, but to pay the 
balances in a foreign trade it is good for nothing. 
The natural superiority of the gold to paper appears 
as soon as a payment is to be made abroad. In 
obedience to this impulse gold naturally and inevita- 
bly goes abroad ; and it has repeatedly gone abroad 
under these circumstances from the United States to 
such an extent that the parties who furnished the 
paper, that is to say, the banks, could no longer re- 
deem their paper in coin, but were obliged to suspend 
specie payments, which is a euphonious circumlocu- 
tion to express going into temporary or permanent 
bankruptcy. In this case also, though less directly, 
the inferior money pushes the superior out of circu- 
lation. I have no hesitation in calling the paper the 
inferior money, both for other potent reasons soon to 
be specified, and because at any rate it is powerless 
in international exchanges. There is believed to be 
nothing in the monetary history of the United States, 
as there is certainly nothing in the known principles 
of human nature, which does not abundantly con- 



ON MONEY. 285 

firm as a universal truth the proposition in hand, 
namely, that worse and better money being in the 
currency together, the worse will expel the better 
sooner or later; sometimes into hoards, sometimes 
into the melting-pot, and sometimes out of the coun- 
try. 

5. A paper money is only tolerable when it is actu- 
ally and instantly convertible on demand into g-old and 
silver. 

I feel no hesitation in using the term paper-money 
although many high authorities will not concede that 
any form of paper can be money at all. They make 
a distinction between currency and money. The 
discussions in this chapter thus far have been pur- 
posely made so general as that the principles will ap- 
ply to a money of paper as well as to a money of coin. 
Any form of value that circulates generally among' all 
classes of people as a medium in their exchanges may 
be allowed to be called money. The essential char- 
acteristic of money is its possession of a generalized 
purchasing power. For a reason soon to be given, 
gold and silver in any form have a more general pur- 
chasing power throughout the world than any form 
of paper can have ; and yet the paper that the 
masses of the people accept as a medium in any 
country, may be regarded as money in that country. 
Checks, drafts, bills of exchange, and so on, are not 
money under the definition. This is a distinction 
recognized in common language, and science has no 
motive to disturb it. The signification of the terra 
money merely marks the fact of a general circula- 
tion, and determines nothing in respect to the nature 
or usefulness of a particular medium. The word 



286 ELEMENTS OF POLITICAL ECONOMY. 

money is derived from the Latin moneta, the mint or 
place where money was coined. The mint of Rome 
was a building on the Capitoline, and attached to 
the temple of Juno Moneta, as the Eerariura was to 
the temple of Saturn. The epithet of the goddess 
passed over first to the mint, and then to that which 
was coined there. 

If I had the making of a new nomenclature, I 
would indeed propose that the term money should 
be used as strictly synonymous with coin ; that the 
term currency should mean exclusively what it now 
means generally, namely, paper-money ; and that the 
term current funds, or cash, should exclusively denote 
checks and other forms of credit- obligation payable 
on demand. But the term Money has already se- 
cured for itself a wider signification than that, and 
may be accurately defined as that value which law, 
or usage equivalent to law, compels a creditor to take 
in payment of a debt. The term Currency is some- 
times used as synonymous with money in the sense 
as now defined, sometimes as including both money 
and those instruments of credit which pass from 
hand to hand by indorsement or mere delivery, and 
sometimes in the restricted sense already noticed, as 
synonymous with paper-money. The term Circula- 
tion is also loosely used by some as equivalent to 
currency in all three of its meanings as above given. 
The term Cash scarcely has any recognized com- 
mercial meaning, except as the Chinese money of 
account, and is coming to be used rather as an ad- 
jective in the sense of "immediately available," as 
in the expressions, " cash funds " and " cb.A\ gold." 



ON MONEY. 287 

The obstacles in the way of a permanent and 
strictly scientific nomenclature at this point of our 
science arise partly from the nature of money, and 
partly from the power of governments in relation to 
legal-tender. Money is a medium of exchange, and 
different things with varying qualities may become 
and have often become this medium, and though I 
have demonstrated that gold and silver make the 
best money, yet most nations use paper-money more 
or less, and hence one difficulty in the way of a 
sharp and universal nomenclature ; and moreover, a 
function of government touches our science at this 
point, and a variable use of this authority, past and 
present, has made it still more difficult to construct 
and maintain a fixed and scientific language in rela- 
tion to money. Governments have no power at all 
to create value, except as they have authority in 
their organic capacity to make contracts ; but they 
have always claimed and exercised the right of de- 
claring what shall be legal-tender for debts within 
their own jurisdiction ; most of them make nothing 
but gold and silver legal-tender; but the United 
States has made paper a legal-tender for twelve 
years past, and has thus exercised control not indeed 
over values but over prices. I cannot refuse the 
courtesy of the term money to a medium which my 
country, however unwisely, makes a legal-tender for 
debts; and while acknowledging that the nomencla- 
ture is unsatisfactory for the radical reasons just 
given, I shall try to make such distinctions and to 
use terms with such precision as shall both convey 
my meaning and clear up some confusions. I shall 
use the terms coin money, paper money, currency, as 



288 ELEMENTS OF POLITICAL ECONOMY. 

including both of tliem, cash fnnds^ as meaning cur- 
rency available on demand, and credit, as including 
all future obligations to pay. 

There is a distinction of the utmost importance 
between coin money and paper money. Coin money 
,is the definite thing, which paper money promises to 
pay to bearer. What is a dollar ? A dollar is 25| 
grains of a metal compound, of which nine parts are 
pure gold and one part is a hardening alloy. It is a 
definite quantity of a definite thing. Government is 
competent, if it pleases, to alter the quantity of gold 
that shall constitute a dollar ; but it is not practically 
competent to make a dollar out of anything else 
than gold. Our government gave up long ago the 
attempt to make standard dollars of silver. After 
every change in the mint laws, a dollar is, and will 
remain, a definite quantity of gold alloyed. What 
is a dollar bill ? It is a promise of the issuer to pay 
to bearer this definite quantity of alloyed gold. 
There is no mystery here, A dollar is a tangible 
commodity. A dollar bill is a promise to give this 
commodity to bearer. Paper money, then, always 
has in it the element of credit, while the other has 
in it no element of credit at all. A gold dollar is 
not a sign of anything, it is not the represen- 
tative of anything ; it stands in its own right, 
just as a bushel of wheat does; it is true that 
its only use as money is to purchase other things, 
but its purchasing-power is within a trifle as great 
whether it be in the form of money or bullion ; and 
therefore a service that is paid for in specie closes 
up the transaction completely, the exchange is con- 
summated, there is no element of delay, of promise, 



ON MONET. 289 

of credit in such an exchange. It is just as when 
the miller renders a bushel of corn to his neighbor, 
and that neighbor renders him a day's labor in re- 
turn. Jn both cases, there is an end. But paper 
money is credit-money. It may be more convenient 
than coin money ; its value, that is to say, its pur- 
chasing-power, may be equal to that of coin money; 
it may even in some circumstances bear a premium 
over coin money ; but all this does not alter the fact 
that there is in it an unlucky element, an unstable 
element, an element which, as men are, is liable to 
some suspicion, the element, namely, of a present 
promise to be fulfilled in future. Paper money walks 
by faith, and not by sight. It is the sign, and not the 
thing signified. It is the representative of something, 
and not that something itself. It is a promise to 
pay, and not the pay itself. It is a credit, and not a 
quittance. And what makes this very certain is, that 
all paper money knows it to be true about itself Tt 
bears this truth stamped on its very face. It does not 
even profess to stand on its own bottom, but leans 
consciously and conspicuously on some solid support. 
The French assignats promised to redeem themselves 
in land ; the continental bills of the old American 
Congress were all to be paid in Spanish milled dol- 
lars ; the bills of the Bank of England profess to be 
and are, redeemable in gold and silver; the present 
irredeemable legal-tender notes of the United States 
and the new national bank bills, are all in terms 
promises to pay to bearer so many legal dollars of 
the United States, that is, so many times 25| grains 
of gold standard fine. These promises have been 
long dishonored. 

19 



290 ELEMENTS OF POLITICAL ECONOMY. 

So long as coin money in considerable quantities 
circulates as a mediun^, either alone or in connection 
with paper money, and is the sole legal-tender for 
debts, the denominations of value will remain com- 
paratively steady. If there be paper money, it is 
convertible at will into coin money, and under these 
circumstances the thing-dollar governs the denomina- 
tion-dollar. It is of the utmost consequence that 
this should alv^^ays be so; because in all operations 
in credit, except in paper money and in what are 
distinctively credit dealings in gold, what is thought 
of, what is promised, what is probably received, is 
something measured by the denomination- dollar, that 
is to say, dollar's -worth. We have already seen that 
a vast number of exchanges are mediated by credit, 
and not by money, but all these exchanges proceed 
on the basis of doUar's-worth, or denomination-dol- 
lars, and could not take place without them ; and 
these, in order to be useful as measures, must be de- 
termined by the use of coin money. The moment 
coin money is dispensed with, and so-called paper 
dollars inconvertible into coin take its place, not 
only are all exchanges mediated by this money af- 
fected, but also all exchanges mediated by credit, 
since the current dollar, whatever it is, determines 
the denomination-dollar. But there is no longer any 
standard. The measure of value has itself become 
immeasurable. Hence, the immense and irreparable 
mischiefs of any abandonment of coin as the cur- 
rent money. Such abandonment involves a variable 
and non-calculable denomination-dollar, which must 
be used in all business, whether the money that 
gives birth to it be used or not. This is the second 



ON MONEY. 291 

distinction between coin money and paper money 
inconvertible — tiie first furnishes a stable measure 
for all exchanges, the second for none. 

We see, then, precisely, the nature of paper money. 
It is made up of promises made by somebody to pay 
to somebody else a definite weight of coined metal. 
All civilized countries now make a certain weight of 
gold or silver bullion their acknowledged standard 
of value ; and, accordingly, paper money can only 
be based upon specie, since specie is the only thing 
that can be meant, when the promise is to pay 
pounds, dollars, gulden, francs. Specie is indeed a 
commodity, like other commodities, but then it is 
the only commodity that is the accepted medium of 
exchange in civilized countries; and therefore, all 
attempts to base a paper money upon land, wheat, 
cotton, mercantile bills, or any other valuable thing, 
involve a direct contradiction in terms. Our propo- 
sition is, that paper money is only tolerable when it 
is instantly convertible into coin ; which is the same 
as to say, that a promise is only good when it is kept. 
An inconvertible paper money is only another name 
for a promise unfulfilled; and no intelligent person 
will ever wonder that unfulfilled promises to pay in- 
variably become less valuable than that which they 
promise to pay. This is the simple secret of the 
inevitable depreciation of all inconvertible money, as 
soon as the amount of it passes a certain limit. 
Even a convertible money, if, by any expedients, the 
amount of it, together with the coin in circulation, 
become greater than the volume of coin alone would 
be then and there, will diminish in value, not indeed 
as compared with specie, but as compared with com- 



292 ELEMENTS OF POLITICAL ECONOMY. 

modities, that is, general prices will rise. AH the 
principles of this whole discussion hinge on the fun- 
damental truth, that money is a medium of exchange. 
Because it is a medium, on'y 3- certain amount of 
it is ever needed at any time to do the healthy busi- 
ness of any country. This limit of quantity not 
being overpassed, paper promises to pay, provided 
they are only kept, will constitute a tolerable money. 
That this limit of quantity is apt to be overpassed, 
whenever paper money is used, whether it be incon- 
vertible or nominally convertible; and also, that a 
paper money can never be successfully based on 
anything but gold and silver, the subjoined histori- 
cal examples will abundantly confirm. 

John Law was born in Edinburgh, in 1671, and 
died in Venice, in 1729. Son of a goldsmith, he 
received an excellent education, and early manifested 
an acute intellect and a talent for finance, but was 
also notorious as a gambler and debauchee. He 
was the first to give scientific form and color to the 
theory (a theory that is still working in many minds) 
that money represents commodities, and may be 
based upon their value. He published this theory 
in a tract, in 1705 ; but endeavored in vain to per- 
suade the government of Scotland to found a bank 
upon his principles. He then carried his scheme to 
Paris, and was again repulsed ; and after a residence 
in many cities, in which he gambled successfully, 
and talked finance to princes and statesmen fasci- 
natingly, he returned to Paris in 1715, with his ill- 
gotten fortune, gained the ear of the Regent Duke 
of Orleans, presented to him a memorial containing 
many sound principles of monetary science combined 



ON MONET. 293 

with the fundamental vice of his system, and was 
allowed by him the next year to found a bank em- 
bodying to a certain extent the new idea. The idea 
may be well expressed in Law's own words : — '-'•Any 
goods that have the qualities necessary in money, 
may be made money equal to their value. Five ounces 
of gold is equal in value to X20, and may be made 
money to that value ; an acre of land is equal to £20, 
and may be made money equal to that value, for it has 
all the qualities necessary in money." For a couple 
of years, or so, Law's bank surpassed all hopes. 
Based on specie and on state debts, it paid its notes 
promptly in coin, and these for a time even bore a 
premium over coin. Law had touched a spring till 
then but little known in France, the potent spring of 
Credit. But his whole thought, meditated on for 
years, could not be expressed through a private bank. 
The State should be a banker ; it should collect all 
its revenues into a central bank, and attract the 
money of individuals to it as deposits ; besides, the 
State has public property of vast value, on tlie 
strength of which paper money can be emitted and 
made legal tender ; and thus the State, instead of 
borrowing, should lend to all on easy terms, and the 
profits thus accruing would lessen or abolish taxes. 
Nor was this all. The State should also be a mer- 
chant; the whole nation should form a commercial 
company, a body of traders, whose common treasury 
should be the State bank. Commerce by individuals 
creates great wealth; why should not the organized 
commerce of a State make everybody rich ? The 
discounts of the bank, and the profits of the trade, 
would surely provide for the public service without 



294 ELEMENTS OF POLITICAL ECONOMY. 

taxation. These vast ideas were actually carried 
out. Law's bank became the Royal Bank, issuing 
a paper money guaranteed by the State and resting 
back upon the value of all national property. The 
money was receivable in taxes, nominally redeem- 
able in coin, and made a legal tender. It actually 
bore at one time five and ten per cent, premium over 
gold and silver. People were anxious to exchange 
their coin for notes. Meanwhile a commercial com- 
pany was formed in connection with the bank, to 
which the State ceded at first the monopoly of the 
commerce of Louisiana and of the Canada beaver 
trade for twenty-five years, and the soil of Louisiana 
forever ; under the auspices of which New Orleans 
was founded, and named from the Regent, the patron 
of the grand system ; and in succession, the monop- 
oly of tobaccos, the rights of the Senegal Company, 
of the East India Company, of the China Company, 
and of the Barbary Company ; until, having almost 
all the commerce of France outside of Europe in 
its hands, it entitled itself the Company of the 
Indies. Its shares rose from a par value of 500 
francs, to 10,000 francs, more than forty times their 
value in specie at their first emission. To support 
such speculations, which completely turned the heads 
of all classes of the people, the amount of paper 
money reached at last the sum of 3,071,000,000 
francs, 833,000,000 more than had been legally 
authorized to be emitted. The collapse of this most 
gigantic financial bubble of history was terrific. Be- 
fore the close of 1720, the shares of the Company 
could be bought for a louis d'or, and the paper 



ON MONEY. 295 

money became worthless.^ Nevertheless, Law was 
a great man. His accounts in all these immense 
transactions were as clear as daylight. He believed 
in his system till the day of his death, and referred 
its faiim-e to the caprices of a despotic government. 
His mind too much loved unity, and his plan gave 
too little scope to individual liberty. But the central 
vice of all was a mistake as to the nature of money. 
Money is a medium^ and its amount cannot be in- 
creased beyond a certain limit without disaster. 
Moreover money does not represent the commodities 
which it helps to exchange, any more than ships 
represent the cargoes which they carry. 

Thus Law's paper money ran its course in about 
four years. Again at the close of the century France 
tested the merits of paper money, and the principle 
that money may represent commodities, on a grand 
scale. As the great revolution went forward, and a 
scarcity of money was experienced, the National 
Assembly, in the spring of 1790, issued, under the 
name of " assignats," a paper money based on the 
value of the lands of the Church which had been 
confiscated to the State. The assignats were receiv- 
able in payment for these landed estates at any 
public sale of the same. The first emission, but not 
the rest, bore interest. That issue was 400,000,000 
francs — about one fifth the value of the confiscated 
lands. In September, 800,000,000 more were author- 
ized, Talleyrand opposing and Mirabeau strongly 
urging these additional issues. " It is in vain," said 
Mirabeau, "to compare assignats, secured on the 

1 Martin's Decline of the Monarchy, chap. i. Macleod's Theory and 
Practice of Banking, chap. xi. Bancroft's United States, chap, xxiii. New 
Am. Cyclo., Art. John Law. 



296 ELEMENTS OF POLITICAL ECONOMY. 

solid basis of these domains, to an ordinary paper 
currency possessing a forced circulation. They repre- 
sent real property, the most secure of all possessions, 
the land on which we tread." Nevertheless, and 
though all assignats were legal-tender, they drooped. 
The government in alarm, while issuing on the one 
hand enormous quantities of the paper to meet the 
vast expenses of the Revolution, which quantities 
were swelled by skillful counterfeiters in the prisons 
and elsewhere, took strong measures on the other to 
prop up their market value ; the use of coin was pro- 
hibited; a maximum price in assignats for everything 
was established by law^; heavy penalties and at last 
death were decreed against those who refused to 
receive them at par ; but it was all in vain. " They 
sink now," says Carlyle, " with an alacrity beyond 
parallel." In June, 1793, the assignats had fallen to 
33, and in August to 16 per cent. Renewed con- 
fiscations kept the estimated value of the public 
domains far in advance of the par value of the assig- 
nats based upon them ; but this had no tendency to 
])revent the depreciation of the assignats, because 
money is a medium of exchang'e, and its proper 
amount has no relation to the estimated value of 
any commodities at all. In February, 1796, the assig- 
nats legally issued had amounted to 45,500,000,000 
francs, and had fallen to one two hundred and sixty 
fifth part of their nominal value, that is, to two fifths 
of one per centum. The government then offered to 
redeem them at 30 for 1 in " mandats," which entitled 
the bearer to take immediate possession at their esti- 
mated value, of any of the lands pledged by the as- 
signats. According to M. Thiers, who is my author 



ON MONEY. 297 

ity in this paragraph, the mandats sold first at 35, then 
rose to 40, and in some places to 80, and soon sank 
again to 5 per centum. A decree of July 16, 1796, 
ended the matter by permitting any one to do busi- 
ness in any money he chose ; and business, which 
had practically ceased under the paper money, re- 
vived again at the sight of the coin, which, of course, 
had been out of circulation. Thus the assignats had 
a course of about six years. The distress and con- 
sternation into which a country falls when its meas- 
ure of value is disturbed and destroyed, as it was by 
the issue of the assignats, is past all powers of de- 
scription- There can be no doubt that these assig- 
nats caused more suffering in the French Revolution, 
a hundred fold, than the prisons and the guillotine. 
It may be said that the government ought not to 
have issued them in such quantities. Perhaps it 
ought not. But there never has been a government 
yet, of the many which have issued irredeemable 
paper, which had the wisdom and the firmness to 
resist for any great length of time the temptation to 
emit large quantities. There is no stopping when 
once the issue is begun. The first batch of such 
paper usually banishes the coin from the currency. 
There is no way to entice it back except to call in and 
burn up the paper. Revolutionary governments are 
not generally in position to be able to do this. Ordi- 
nary national expedients are denied them. They can- 
not borrow. Therefore they have recourse to credit- 
money, which is really borrowing without interest, 
and when once the press is set at work it must work 
on with livelier speed, because just in the ratio of 
the depreciation is a greater amount required to 



298 ELEMENTS OF POLITICAL ECONOMY. 

meet the ordinary payments. This example is sig- 
nificant, because it shows the powerlessness of even 
llie strongest and most unscrupulous governments 
to regulate the value of anything. The assignats 
were depreciating during the very months in which 
Robespierre and the Committe of Public Safety were 
wielding the power of life and death in France with 
terrific energy. They did their utmost to stop the 
sinking of the revolutionary paper. But value knows 
its own laws, and follows them, in spite of decrees 
and penalties. 

The bills of credit issued by the Continental Con- 
gress during the American Revolution had a course 
and issue very similar to those of the French assig- 
nats. Unlike them, these were based simply upon 
the good faith of the people whom the Congress 
represented. Their vice was not, as in the previous 
instances, the supposition that money may be 
founded on the value of specific commodities; but 
their emission ignored this fundamental law of 
finance, namely, that the value of money arises as 
all other value arises, and is amenable to the same 
principle of supply and demand as other values ; and 
their vice, consequently, was, that there was no nat- 
ural limitation of their supply. Money is either an 
intermediate and equivalent merchandise, or prom- 
ises to pay it; that is to say, gold or silver, or prom- 
ises to pay them ; and mere promises to pay them, 
such as the continental bills were, unaccompanied 
by any provision to pay them, have no natural limi- 
tation of supply. In June, 1775, $2,000,000 were 
emitted; in November, $3,000,000 more; the next 
February, $4,000,000 more ; and in August, $5,000,- 



ON MONEY. 299 

000 more. The depreciation began before the next 
issue of $5,000,000, May, 1777. But the bills kept 
up to par for more than a year. As the emissions mul- 
tiplied, the depreciation became rapid. In August, 
1777, they exchanged with silver at 3 for 1 ; in Feb- 
ruary, 1779, at 10 for 1 ; and in November, 1779, the 
date of the last emission, at about 40 for 1. Early 
the next year they dropped out of circulation alto- 
gether. Thus their course was run in less than five 
years. The Congress pledged itself not to emit over 
$200,000,000 in all ; but I suspect that that limit, as 
is usual in such cases, was considerably overpassed, 
either by design or fraud. Jefferson estimates that 
the nation realized from the |200,000,000, |36,367,- 
720 in specie value.^ Most of these bills were never 
redeemed. 

The United States legal-tender notes which began 
to be issued in April, 1862, and of which $450,000,000 
were put into circulation, are in their nature like the 
continental bills, and have been more or less depre- 
ciated from the first, and at times very much depre- 
ciated. It may be questioned whether the making 
these notes a legal tender has appreciated their value 
at all ; so far as the demand for them to pay debts 
with has been thereby increased it has had such a 
tendency, but so far as it indicated a lack of confi- 
dence on the part of the government in the validity 
of its own promises the tendency has been the re- 
verse. The faith of the people in their money is 
very properly more sensitive and more easily shaken 
than their faith in anything else ; and this is one of 
several weighty reasons why the element of credit 
should not enter into the money at all. Credit is 

1 Jeflerson's Works, vol. ix., page 259. 



300 ELEMENTS OF POLITICAL ECONOMY. 

good in its place, but in the people's current money 
it is out of place. Hence these notes, notwithstand- 
ing their legal-tender character, have been much 
more depreciated than any form of the national 
bonds. I cannot think that good financiering would 
have found it necessary to issue such paper; and I 
am quite sure that making it legal-tender has not on 
the whole enhanced its value. In the Eastern and 
Middle States, the legal-tenders had no more accept- 
ance at first than the bills of their State banks, which 
were equally irredeemable. 

Between the years 1782 and 1865, there circulated 
in the United States a paper money consisting of 
bills issued by banks established under the authority 
of the individual States. These bills were nomi- 
nally convertible into coin at the will of the holders. 
Some of the States required their banks to keep a 
percentage of specie on hand for the redemption of 
their bills ; but most of them required only a deposit 
of some kind of securities with an officer of the 
State, on the strength of which securities the banks 
were allowed to issue an equivalent value in bills ; 
and some of the States did not even require so much 
as this. The fallacy of founding a paper money 
upon public securities, will be fully exposed in the 
following paragraphs; it is here only necessary to 
observe that our proposition, if correct, condemns 
the money of these State banks. Some of it was 
better than the rest, but none of it deserved the 
praise of being a satisfactory money. (1.) It was 
liable to great and sudden contractions and expan- 
sions in volume. For instance, the volume in 1858 
was $59,£T0,474 less than in 1857; and in 1863 



ON MONEY. 301 

$54,885,139 more than in 1862. (2.) The ratio of 
paper to the specie reserved to redeem it was a high 
ratio. The average for the whole country in Jan- 
uary, 1863, was 4 to 1 ; in Rhode Island more than 
12 to 1 ; and in Vermont more than 28 to 1.^ Such 
a paper can only be called redeemable by stretch of 
courtesy. (3.) As a matter of fact, so soon as there 
began to be a financial pressure, especially when- 
ever the exigencies of commerce withdrew gold for 
foreign trade from reserves already so small, the 
banks were compelled to confess, what everybody 
knew before, that they were unable to redeem their 
promises. Four or five times, during the continu- 
ance of the system, panics attacked the paper money, 
and the banks suspended specie payments. In these 
times of stress some of the banks did better than 
others ; the Bank of the State of Indiana, for exam- 
ple, under the management of the Hon. Hugh Mc- 
Culloch and others, maintained specie payments in 
the trying periods of 1857 and ISGl.'-^ (4.) The insta- 
bility of the general system tended towards a reckless 
way of doing business, and led on to frequent bank- 
ruptcies, which became a just reproach to u^ in for- 
eign countries. The banks contributed powerfully 
in times of quiet by a system of generous loaning, 
on which their profits depended, to induce a spirit 
of speculation and a willingness to contract debts, 
and experienced when the reaction came, how much 
easier it is to loan paper promises than to fulfill them. 
Their inability to continue in troublous times the 
free loans which helped to bring them on, and their 

1 Finance Report, 1863. 

2 Letter of Mr. McCulloch, August 17, 1867. 



302 ELEMENTS OF POLITICAL ECONOMY. 

repeated failures to make good the obligation to re- 
deem their own notes, caused incalculable losses of 
property. There can be no hesitation in affirming 
that the expense of maintaining a gold and silver 
money for all the wants of the whole country, might 
have been met many times over from the losses 
resulting from this bank-paper system. It is fortu- 
nate that the people concluded to abandon it. 

We come now to the money of the present na- 
tional banks organized under the law of February, 
1863. This money is really much better than that 
last considered, because the banks issuing it are 
amenable to a central authority and to common reg- 
ulations. They deposit with the national Comptrol- 
ler of the Currency gold-bearing government bonds 
to an amount somewhat greater than that of the 
circulating notes which they receive back from him, 
so that the redemption of the notes may be provided 
for by the sale of the bonds, in case the banks do 
not redeem the notes. The banks are also required 
to hold in reserve a certain percentage of lawful 
money of the United States. It was expected that 
this phKase "lawful money" would be judicially in- 
terpreted to mean the legal coin rather than legal- 
tenders. The total amount of notes authorized at 
present to be issued by all the banks is $354,000,000. 
It might seem as if this form of money would meet 
our test; nevertheless, there is a vicious principle 
that underlies the foundation of the present system. 
It is just as bad in principle to base a paper money 
upon government debt, as upon lands, or other com- 
modities. The evidences of government debt are 
usually salable in the market at some price, and so 



ON MONEY. 303 

are lands, mercantile bills, and all the articles of a 
prices current. Perhaps the government debt is more 
uniformly salable than any of them ; but there is no 
relation of a proper amount of money for any coun- 
try to the amount of its national debt, any more than 
to the value of its lands. The absurdity of the prin- 
ciple is only disguised by an arbitrary limitation of it. 
If it is proper to base ^300,000,000 of paper money 
on $333,333,333 of government bonds, why is it not 
proper to base $300,000,000 more of paper money on 
$333,333,333 more of the government bonds, and 
so on, till the amount of money shall approximate 
the amount of the debt ? Any limit placed is purely 
artificial. One Congress may think that $300,000,000 
of paper money is enough, another that $600,000,000 
will not be too much, and the third enact a free 
banking law, by which all the debt may become a 
basis for paper money to rest on. The primary 
function of money, it must be repeated, is to serve 
as a medium of exchange ; and the quantity of such 
a medium required to facilitate the exchanges in any 
country is impossible to be determined by law. The 
only safety, under our present system, is to make the 
amount of paper decidedly less than what is known 
to be the necessary amount of the whole circulating 
medium, and then allow coin money to fill up the 
deficiency in accordance with its own laws. If 
we could be assured that the present limit of 
$354,000,000 will not be increased, that no other 
paper money will be allowed, and that both gov- 
ernment and banks will resume specie payments, 
then a fair degree of confidence in this money 
would be reasonable; then a part (too small a part) 



304 ELEMENTS OF POLITICAL ECONOMY. 

of the currency would become specie, and the paper 
might be kept at par all the while, and we should 
gain something by the superior convenience of the 
paper, and not lose much by its inferior steadi- 
ness. But the mischief of it is, this money can- 
not regulate its own quantity; it is not guarded, 
as gold and silver are, by a natural limitation of 
supply; a simple vote of Congress is sufficient to 
increase it, as the original limit has been already 
overpassed by the authorization of 18 per cent, 
additional. After all that can be said in favor of it, 
it is credit-money still, and exposed to the dangers 
inseparable from credit-money, namely, the distrust 
of the people, the undue enlargement and sudden 
diminution of its volume, a consequent unsteadiness 
of value, and inconvertibility. If we are to have a 
national paper currency expanding and contracting 
under the successive tinkerings of Congress, we shall 
yet experience more of those evils of credit-money, 
from which we have suffered in the past so exten- 
sively in property and reputation, and which nothing 
but our exuberant and exulting strength has enabled 
us to outlive and to forget. 

Our last example of credit-money shall be the bills 
of the Bank of England. This is an association of 
individuals incorporated under the style of the " Gov- 
ernor and Company of the Bank of England." The 
bank was a child of the English Revolution, and 
was incorporated by Parliament in 1694, on condi- 
tion that its stockholders should loan to government, 
then pressed for funds, the sum of X 1,200,000, on 
which they were promised eight per cent, as interest, 
and ^4,000 for management, per annum. On the 



ON MONEY. 305 

strength of this capital stock, which was simply so 
much of government debt, the bank was authorized 
to issue bills to an equivalent amount, but which at 
first could only pass from hand to hand by succes- 
sive indorsements. The first charter was terminable 
at the pleasure of the government any time after 
August 1st, 1705, by giving a year's notice to the 
bank, and by paying the debt due to it. The bills 
at j&rst were paid promptly in coin on demand; the 
bank became the means of increasing the credit at 
home and the strength abroad of the revolutionary 
government of William and Mary; and conse- 
quently the Whigs were the friends, and the Jaco- 
bites the foes, of the bank. The government was 
strengthened in a sense by its own indebtedness; 
for it was felt that if James 11. should regain the 
throne, no pound of the loan would ever be paid 
back. " So closely," says Macaulay, '^ was the inter- 
est of the bank bound up with the interest of the 
government, that the greater the public danger the 
more ready was the bank to come to the rescue." 
As already related under the last general proposition, 
the silver coins of the realm were at this time much 
worn and clipped; the bank had received them at 
their nominal value ; but after the recoinage began 
in 1696, it was obliged to redeem its bills in new 
coin of full weight, that is, for perhaps 7 ounces of 
Eilver received, it was now bound to pay 12.^ Con- 
sequently its enemies made a run upon the bank by 
collecting its notes to a large amount and presenting 
them for redemption. The bank was obliged to sus- 
pend specie payments, at first partially, and then 

1 Macleod's Banking, vol. i., page 357. 

20 



306 ELEMENTS OF POLITICAL ECONOMY. 

generally. In February, 1697, its notes were 24 per 
cent, below par. A new charter, granted just at this 
time, extended the term, and doubled the capital 
stock of the bank, one fifth of the subscriptions to 
which increase was receivable in bank notes. This 
brought up the notes to par, and made the indebted- 
ness of government to bank <£2,201,171. This sec- 
ond charter practically gave the monopoly of banking 
in England to the Bank of England, and provided 
that if the bank did not redeem its notes, they might 
be presented at the Exchequer and redeemed out of 
the annuity due to the bank. In 1709 the term was 
again extended, the capital stock again doubled, and 
the interest on the whole debt reduced from eight to 
six per cent. Each increase of the debt due from 
the government to the bank carried along with it the 
privilege to the bank of increasing by so much the 
issue of its notes. Here is the vicious principle in 
the Bank of England. It assumes that a paper money 
may be properly based on a government debt. But 
upon how much of that debt ? A limit must be 
placed somewhere ; and the goodness of the money 
will depend after all not on the debt, but upon the 
coin on hand to convert the money. The bills of the 
Bank of England have been and are a tolerable 
money, not so much because there is a part of the 
national debt behind them, as because there is gen- 
erally a plenty of solid cash behind them. In 1716 
the bank was exempted from the operation of all 
usury laws: why the bank only, and not other peo- 
ple as well, the act of Parliament does not state. In 
1720, and again in 1745 when the Young Pretender 
made the last rally of the Jacobites, there were severe 



ON MONEY. 30t 

runs upon the bank ; on both occasions, in order to 
gain time, notes were paid in shillings and sixpences. 
Best friends were also accommodated first, who are 
said to have returned the bags of money as fast as 
they received them. The practice of indorsing the 
notes became gradually disused, though the law at 
first did not follow the innovation. In 1759 £15 
and <£10 notes began to be issued. Till then there 
were none less than <£20. The bank kept advancing 
various sums to government on various conditions, 
mostly however at three per cent., till 1782, when the 
debt stood £11,642,400. When England plunged 
into the war of the French Revolution, the bank 
came under the imperious will of William Pitt. His 
constant demands for money could not be met, and 
the bank at the same time give its usual accommo- 
dation to merchants. Thus the merchants were 
refused. The monopoly now bore its bitter fruit. 
Private credit wavered, and there was a run upon the 
bank for cash. The bank suspended specie pay- 
ments in February, 1797, and did not resume them 
till 1821. Government and the business men of 
London did their best to hold up the credit of the 
notes during the suspension, but they were not made 
a legal tender for debts. Government received them 
at par for taxes, and provided that business pay- 
ments in notes would be held as payments in cash 
if offered and accepted as such. Debtors, having 
tendered bank notes, which the creditor refused, had 
certain privileges before the law, which other debtors 
had not. The notes therefore had a quasi legaliza- 
tion, but not a forced circulation. The bank was 
also authorized at this time to issue £5, X2, and £1 



308 ELEMENTS OF POLITICAL ECONOMY. 

notes. Cautiously issued at first, bank paper con- 
tinued at par for several years after the suspension, 
which proves that when government possesses the 
monopoly of issuing paper money, and carefully 
limits its quantity, and both receives and pays it out 
at par, it may keep an inconvertible paper at par, or 
even by sufficiently limiting its quantity carry it 
above par. But this truth does not make an incon- 
vertible paper a good money, because it does not 
make it a self-regulating money, and because gov- 
ernment is not wise and firm enough to fix and 
maintain a proper limit. Though Parliament in- 
tended in successive acts to confirm to the Bank of 
England the monopoly of banking by enacting that 
no partnership of more than six persons should take 
up money on its own bills, yet the common law 
assured to private persons and smaller partnerships 
the right to do this ; and private bankers multiplied 
after the suspension, since they were allowed to pay 
their notes in Bank of England notes. Thus the 
quantity of paper money gradually increased till in 
August, 1813, the Bank of England notes were at 
thirty per cent, discount in gold. In the following 
years, large numbers of country bankers failed, and 
their notes were reduced to one half what they had 
been, and Bank of England paper rose almost to par, 
and a partial resumption of specie payments took 
place in 1816. In accordance with the principles of 
the celebrated Bullion Report of 1810, which demon- 
strated that the market price of gold (in paper) and 
the state of the foreign exchanges were the infallible 
indices of the value of a paper money. Parliament, 
in 1819, passed an act requiring full resumption of 



ON MONEY. 309 

specie payments at the bank in 1823. The resump- 
tion actually took place in May, 1821. In 1829, all 
notes whatsoever for less than £5 were forbidden to 
be circulated in England. When the bank charter 
was renewed for the ninth time in 1833, the bills of 
the Bank of England were declared to be a legal 
tender for debts, so long- as the bank paid them on de- 
mand in legal coin ; and the same act legalized the 
issue of paper money by other banks (no matter 
how many partners) outside of a radius of sixty-five 
miles from London, and also legalized banks within 
the radius, but they could not issue paper money. 
From 1694 to 1711, the issues of the bank were 
limited by law to the amount of the debt owed to it 
by the nation ; from 1711 to 1844 there was no lim- 
itation on the issues, only the bank was required (the 
suspension excepted) to pay its notes in coin on de- 
mand; but in 1844, Sir Robert Peel gave the bank 
through Parliament a new constitution, under which 
it is still managed, and which restricts its issues to 
.£15,000,000 on the ba'sis of securities, of which 
something over .£11,000,000 consists of the govern- 
ment debt, and for all issues beyond this amount it 
must have pound for pound of gold and silver in its 
coffers. The average amount of notes in circulation 
is about .£30,000,000, one half based on specie in 
reserve and one half on securities. The bank is also 
obliged to buy, and pay for in notes, all gold bullion 
and foreign coins offered to it, at the rate of £3 lis. 
9d. per ounce standard fine ; so that, if notes depre- 
ciate as compared with coin, they can be at once 
changed into coin, or bullion and coin can be changed 
into notes if the latter are preferred. The issue de- 



810 ELEMENTS OF POLITICAL ECONOMY. 

partment of the bank is made quite distinct from 
the loaning department, which latter, receiving its 
notes only from the issue department, raises and 
lowers its rate of discount according to the state of 
the market, but usually keeps its rate a trifle higher 
than the market rate, so as to be able to act as a 
support to private bankers and others in case of 
pressure. For many years the bank has conducted 
its business upon the sound principle of raising its 
rate of discount whenever the foreign exchanges be- 
come adverse and there is a consequent call for gold 
for exportation, and also whenever the rate of dis- 
count in the neighboring commercial countries is a 
good deal higher than its own. The due proportion 
of the paper money to the specie in reserve is main 
tained through a proper regulation of the rate oi 
discount. The regulating act of 1844 restricted the 
issue department, but it did not restrict the loaning 
department. Gold can be drawn from the bank not 
simply by the presentation of notes, but also by the 
checks of depositors, that is,' by those who have sold 
bills of exchange to the bank. Hence the converti- 
bility of the notes can be kept up only by careful 
regulation of the rate of discount. Thrice since 
1844 the government has authorized the bank to vio- 
late its charter, and to issue more notes than that 
allows on securities temporarily ; in 1847, in 1857, 
and again in 1866. The propriety of this restric- 
tion has been, and is still, vehemently debated in 
England ; and it is an open question also whether 
England is any richer for the use of Bank of Eng- 
land bills. It seems to me that the purposes of the 
Bank of England, as a great national bank of sup- 



ON MONEY. 311 

port, would be better met by the abolition of this 
restriction. Banking is now thoroughly understood 
by the Directors of the Bank of England ; and they 
may be safely left to their discretion to sustain pub- 
lic credit in times of crisis. The Joint Stock and 
Private Banks of the United Kingdom are at present 
authorized to issue a little over ^15,000,000 of bank 
notes. The average circulation of all the British 
Banks is a little less than X45,OOO,O0O. There are 
j£80,000,000 of coin money in the currency of Great 
Britain. The ratio of paper money to coin money 
in France is very nearly the ratio of 13 to 35. 

In my judgment, the most economical, and, taking 
all things into consideration, every way the best 
money, is the gold and silver which God has evi- 
dently designed for that purpose. I would have no 
other money, still less any other legal-tender. This 
position does not exclude the freest use of those con- 
venient, economizing, commercial expedients, such 
as bills of exchange, drafts, checks, money-orders 
through the post-office, and so on, which are suffi- 
cient to prevent for the most part all burdensome 
transfers of coin. The public has not yet reflected 
sufficiently on the peculiar functions of money, nor 
discriminated as it should the proper sphere of credit 
from the proper sphere of currency. Let the cur- 
rency stand securely in its own right as value-money, 
and then the various forms of paper credit will 
safely come in to remove all the inconveniences and 
secure all the advantages of a perfectly sound, an 
everywhere acceptable, and a naturally self-regulat- 
ing money. 
6. Government ought to leave freely to the parties 



312 ELEMENTS OF POLITICAL ECONOMY. 

concerned the rate of interest to be paid on money 
loaned. 

The law of Moses forbade to the Israelites the 
taking from one another any interest on money 
loaned, but at the same time it allowed them to 
take such interest freely of strangers; the permis- 
sion in the one case going to show that there is 
nothing in the taking of interest in itself unjust or 
sinful, and the prohibition in the other being readily 
explainable from the general purpose of the munici- 
pal regulations of Moses, which was to found an agri- 
cultural and not a trading commonwealth, in which 
every family was to possess land that could not be 
permanently alienated or sold, in which it was a 
great object to maintain the personal independence 
and equality of these families, in which the law for 
the recovery of debts was very summary and effect- 
ive, lessening the risk of losing the principal, ^and 
which was to be and was sedulously separated in 
its usages from the surrounding nations. It has 
been well understood for a long time that the mu- 
nicipal code of Moses was local and peculiar, not 
necessarily applicable at all to the circumstances of 
other States, and in no sense binding on the con- 
science of legislators ; and yet there doubtless sprung 
from the prohibition referred to a prejudice against 
interest, and this prejudice was perhaps deepened 
in the Middle Ages and onwards by the conduct of 
the Jews themselves, who, in addition to their sin 
of persistently growing rich in spite of the endless 
disabilities laid on them by the people of Europe, 
always demanded, in accordance with the permis- 
sion of their great lawgiver, a per cent, of interest 



ON MONEY. 313 

from those strangers to whom they became money- 
lenders. The Jews were everywhere hated, and con- 
sequently the usury which they practised was hated 
also. The fundamental absurdity of forbidding in 
trading communities the taking of interest on sums 
loaned to a borrower which he was at liberty to use 
for his own profit, deterred the nations from going 
to the length of prohibition, unless it might be in 
the case of the hated Jews. There is a clause of 
Magna Charta, interesting as showing how early the 
children of Abraham became the money-lenders of 
Europe, to the effect that, during the minority of 
any baron, while his lands are in wardship, no debt 
which he owes to the Jews shall bear any interest. 
The prejudice against interest embodied itself in 
what are called usury laws. These, without pro- 
hibiting the taking of interest, prescribe a maximum 
rate per cent., which lenders may receive, and an- 
nounce a penalty in case they take more. The pen- 
alty is sometimes the forfeiture of the entire interest, 
and sometimes of the entire debt. 

Usury laws, however, have not sprung wholly from 
the old prejudice that to take interest was a great 
moral wrong, and the greater the more was taken ; 
they sprung also from a false notion which used to 
be pretty general, but which is now at length thor- 
oughly exploded, that governments were competent 
to determine the value of their own money ; and 
there has been, and is still, a curious and harmful 
confusion in respect to this term, the value of money. 
In the only proper sense of the term, the value of 
money means its power of purchasing services in 
general, and the value of money is high when a 
given sum of it will purchase much of general ser- 



314 ELEMENTS OF POLITICAL ECONOISIY. 

vices, and low in the contrary case ; but, unfortu- 
nately, the terms " high and low value of money " 
have also been used to denote a high or low rate 
of interest on money loaned, which is a very differ- 
ent signirication, and a high or low rate of interest 
depend on a very distinct set of causes from those 
which determine a high or low value of money ; 
nevertheless, so long as governments supposed that 
they could regulate the latter, it is perfectly natural 
that they should also suppose that they could regu- 
late the former; and although all intelligent govern- 
ments have given over the idea of being able to 
regulate the value of money, many of them still 
adhere to the idea, equally false as the other, that 
they are able to regulate the loanable value, or the 
rate of interest, at least to prevent any more than 
their prescribed maximum rate from being taken. 
Are such laws needful ? Are they beneficial ? Are 
they in accordance with sound principles, or do they 
violate them ? Has a government any right, after it 
has stamped of engraved its money, and parted with 
it to the people in return for value received, to say 
that they into whose hands it has rightfully come 
shall only have so much under any circumstances as 
a reward for foregoing the use of it themselves that 
somebody else may have the use of it ? 

Let us see precisely the nature of the transaction 
when one man loans money to another. It is a clear 
case of value. The lender does a service to the 
borrower, and for this service justly demands a com- 
pensation. The service is this : The lender might 
himself use the money to gratify his own desires. It 
is his money ; he may use it, as he pleases, for bis 
own gratification. Or, he may himself employ it 



ON MONEY. 315 

productively, and, at the end of the period, receive 
back his principal with the customary rate of profit. 
If he surrenders this advantage to the borrower, if 
he passes over to him the right to use this money, 
Bay, for a year, he practices what we call in Political 
Economy abstinence. For this abstinence he has a 
right to claim a reward, precisely as the man has a 
right to claim a reward who foregoes working for 
himself in order to work for me. This reward of 
abstinence is interest. The money-lender foregoes 
an advantage. He performs a service for the bor- 
rower; and, therefore, the right to interest stands on 
just as unassailable ground as the right to wages. 

The loanable value of money varies under exactly 
the same conditions as every other value varies. It 
is determined, as every other value is, by the actual 
exchanges between lenders and borrowers; or, rather, 
by what would be the actual exchanges, if they were 
left free. Now for any government to compel a bor- 
rower to pay six per cent, when he might otherwise 
borrow for five, or a lender to take only seven per 
cent, when his money is worth eight, is a direct vio- 
lation of the rights of property. It is a forcible and 
pernicious interference with the freedom of contracts. 
It is based on the false premise that the loanable 
value of money is uniform, and that government is 
competent to determine what it is. No value is 
uniform. And no government is competent to deter- 
mine even the maximum price of money loaned, any 
more than the maximum price of commodities. 

On principle, then, these are the two considera- 
tions which condemn usury laws. First, it is invidi- 
ous to allow other men, in every department of busi- 



316 ELEMENTS OF POLITICAL ECONOMY. 

nessj to exchange their services on the best terms 
they can make, without any interference or control, 
and then, without rendering any solid reason for it, 
to deny this privilege to money-lenders, who offer 
just as honorable and useful services to society as 
any other class of men. Second, it is a false notion 
altogether, that the loanable value of money is, or 
can be made, uniform ; and, therefore, a rate per 
cent, fixed by the government constantly infringes 
on the rights of property, — on the rights of the bor- 
rowers, if the rate is too high, on the rights of the 
lender, if the rate is too low. But there are two 
other considerations, each, if possible, better than 
these, which condemn all legal rates of interest. 
The first is, that such laws are rarely obeyed, and 
can scarcely be enforced. Common sense is outraged 
by a law which requires a man to part with his 
property at less than the actual value ; and when 
common sense is against a law, it stands a slim 
chance of observance. If the legal rate be six, and 
the actual worth be eight, who lends at six ? Not 
the banks. They require deposits of their custom- 
ers, the use of whose money shall make up to them 
the difference between the legal and the actual rate. 
The modes of evasion are various, but they are ade- 
quate. 

" But usury laws, if they were not disregarded, 
would be even worse in their tendency than they are 
now. They aim, I suppose, to aid borrowers, and 
make it easier for them to contract loans. But are 
borrowers, as a class, any more deserving of the fos- 
tering care of government than are lenders ? Even 
if it could make its interference effective, as it can 



ON MONEY. 317 

not, is there any reason why government, leaving 
these borrowers to make all other bargains, sales, 
and transfers according to their best skill and judg- 
ment, should rush to their rescue only when they 
propose to borrow money ? If they are competent 
to do their other business for themselves, govern- 
ment pays their capacity a poor compliment in 
undertaking to help them in the single matter of 
making loans ; and the borrowers in turn have rea- 
son to pray to be delivered from their friends, since 
they, of all others, would be the men especially in- 
jured, if all the lenders obeyed the usury laws. Sup- 
pose that a borrower is in great need of a loan, and 
that for some reason his credit is now a little weak. 
Many men would be willing to loan him at nine per 
cent., which affords a margin for the extra risk, 
but at seven, which we will suppose the maximum 
allowed by the law, he cannot borrow a dollar, be- 
cause his credit is not quite equal to the best. If, 
therefore, the lenders obey the law, he, and such as 
he, must fail. And because it is unlawful to take 
over seven per cent., he will be obliged to pay those 
who are willing to violate the law ten or twelve, to 
compensate them for the risk and odium of such 
violation, while, under freedom, he could borrow at 
nine. Moreover, if the loanable value of money at 
the time be actually nine, while the law only allows 
seven, many men will attempt to use their own cap- 
ital productively, who would otherwise loan it, in 
order to realize the high rate ; and this action of 
theirs still further restricts the loan-market and 
makes it more difficult to borrow. If, then, the 
purpose of government be to aid borrowers, no 



318 ELEMENTS OF POLITICAL ECONOMY. 

means could be more unskilfully chosen for that 
end than to pass usury laws, since such laws, so 
far as they are obeyed, have necessarily the oppo- 
site tendency ; and even when violated redound to 
the disadvantage of borrowers, so long as the laws 
themselves are popularly regarded as of any legal or 
moral force. 

Governments have shown a noteworthy inconsis- 
tency in this matter, which incidentally proves the 
unsoundness of their whole action. While announc- 
ing pains and penalties to those \vho take or pay 
more than a given rate, they are careful never to 
bind themselves down to any given rate. Govern- 
ments are always more or less borrowers, and if 
usury laws are necessary in order to help borrowers 
in a pinch, there ought to be a clause in the organic 
law of every country, forbidding the government to 
pay and its lenders to take any more than a certain 
rate per cent. There is no such clause in any 
organic law. Governments wisely follow the nat- 
ural market, and borrow low when they can, and 
pay high when they must. In the last months of 
Mr. Buchanan's administration, the United States 
paid twelve per cent, on a public loan, and could get 
but little at that. Sauce for the goose is sauce for 
the gander, and if usury laws are good for the citi- 
zens, some solid reason ought to be rendered why 
they are not good for the government. The truth is, 
they are not good for either, since natural laws are 
perfectly competent to regulate the rate of interest, 
and do regulate it substantially in spite of a facti- 
tious, impertinent, and mischief-making interference. 
The rate of interest has little to do with the value of 
money, properly so called. It depends on the propor- 



ON MONET. 319 

tion between the sums of money ready to be loaned 
in any market, and the amount wanted at that 
time by good boiTOwers in that market. Every rise 
in the rate tends to lessen the demand of borrowers, 
and every fall to enhance that demand, and thus 
every rise and fall of interest tends to check itself, 
and while the daily and monthly variations of the 
rate for first-class borrowers are very considerable, 
the general average of the rate by years, especially 
in England, where usury laws are mostly or wholly 
swept away, is remarkably uniform. 

In 1867, the State of Massachusetts repealed all 
its usury laws, though six per cent, is to be understood 
in the absence of special agreement, and the result 
has been entirely satisfactory to all classes of the 
people. Rhode Island had done this previously, and 
has experienced equal satisfaction in the result. 
Other States will soon follow in their lead; and this 
relic of ignorance and prejudice will pass away. 
Adam Smith left the " Wealth of Nations " disfig- 
ured by the concession that governments might prop- 
erly enough pass usury laws; but it is gratifying to 
be able to add, that he was convinced of his error in 
that by Bentham's book on usury, and fully ac- 
knowledged his conviction in the spirit of a genuine 
lover of truth. We conclude, then, that usury laws 
are needless, since interest, like all other prices, will 
perfectly adjust itself. They are disregarded, since 
lenders will loan or withhold their money according 
to their own keen sense of interest. They are per- 
nicious, since they infringe the rights of property, 
and tend to prevent weak borrowers from having a 
fair chance in the market. 



320 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER XL 

ON CUEllENCY IN THE UNITED STATES. 

I VENTURE to offer to guide my readers in an attempt 
to trace the steps, State and national, as well the 
earlier as the more recent, which have been made in 
this country to find the way to a healthy, safe, and 
uniform currency. Paper money of almost every 
conceivable variety has been tried at one time and 
another; and the national government for itself, 
between 1836 and 1862, made the experiment of dis- 
carding every kind of paper, both paying out and 
demanding to receive gold and silver money only. 
This money it has always minted, as it has a monop- 
oly of the coinage ; but otherwise, and except as now 
taxing heavily State bank-bills, it has left the States 
and the people to fabricate and circulate whatever 
kinds of money they might choose. 

From the first establishment of the English colo- 
nies in America, the matter of a suitable exchange- 
medium attracted public attention, and was found to 
be attended with difficulties. The colonists drew all 
their supplies from the mother country, and for a 
long time had but few native products to export in 
return, and consequently there was a constant ten- 
dency in the coin which reached them to flow off 
again to England in payment of these debts. But 



ON CURRENCY IN THE UNITED STATES. 321 

something must be used for the purposes of domestic 
exchange. Tobacco in the southern colonies, and 
corn and wheat in the northern, were employed for a 
long time as a local and legalized currency. 

In 1690 Massachusetts set the first example, which 
was soon imitated all over the country, of issuing 
bills of credit, a government paper made receivable in 
taxes, and afterwards made legal tender in payment of 
ordinary debts. At first these bills, or treasury-notes, 
were issued, not to furnish a currency, but merely as 
a convenient way of anticipating the taxes, that is, 
to realize them at the beginning of the year, while 
they would be gradually paid in in the course of the 
year. They were like the English exchequer-bills 
except that they bore no interest. Afterwards, a 
scheme originating in South Carolina came into 
general favor, namely, to open loan-offices for the 
issue of colony-bills, which should furnish at once 
capital for borrowers, and a currency for the people, 
and the interest was to be a source of revenue to the 
colony. 

But in whatever way issued, whether in the way 
of loan to borrowers, or in anticipation of the taxes, 
the essential and inherent vice of such irredeemable 
paper was soon everywhere apparent. There was a 
constant tendency to over-issue, and consequently a 
necessary depreciation. There never was a govern- 
ment yet, of all those which have attempted the issue 
of inconvertible paper, which had prudence and firm- 
ness enough to resist for any great length of time the 
temptation to issue such paper in excess. It always 
has depreciated from that cause, and it probably 
always will. So it was, at any rate, in these coloniea 

21 



322 ELEMENTS OF POLITICAL ECONOMY. 

thus early in our history. The bills of credit were 
issued profusely, and depreciated indefinitely. In 
1749 Massachusetts had found paper money so 
utterly wanting as a measure of value, that she deter- 
mined to abandon it altogether. She redeemed all 
her outstanding bills in cash at the current rate at 
which they were then exchanging. 

The demands of the old French war, and the va- 
lious attempts to conquer Canada, led, on the part of 
all the colonies except Massachusetts, to new and 
large issues of bills of credit, which depreciated of 
course. Soon after the conquest of Canada the 
British Parliament passed an act prohibiting to all 
the colonies the issue of bills of credit; but from this 
restraint the Revolution set them free ; and, to pro- 
vide means for the desperate struggle with the mother- 
country, there was no resource but in paper money. 

In April, 1775, Massachusetts, which had disused 
paper money for more than a quarter of a century, 
revived its use by authorizing the issue of colonial 
bills to the amount of X100,000, in sums small 
enough to circulate as a currency; and on the 23d 
of June following the Continental Congress began 
its fiscal operations by voting to emit two millions 
of dollars in continental bills of credit. Fourteen 
months had elapsed, and fourteen millions of conti- 
nerital paper had been authorized, besides large local 
issues, especially in New England, before its depre- 
ciation excited any very considerable alarm. It soon, 
however, became evident that the only way to stop 
the depreciation would be to stop the issues ; and 
Congress made very persistent but ineffectual at- 
tempts to substitute for further issues a system of 



ON CURRENCY IN THE UNITED STATES. 323 

loans on paper bearing interest. At the same time 
they sought to sustain their failing credit by a reso- 
lution that their bills " ought to pass current in all 
payments, trade, and dealings, and be deemed equal 
in value to the same nominal sums in Spanish dol- 
lars " ; and that all persons refusing to take them 
ought to be considered " enemies of the United 
States," upon whom it was recommended to the 
local authorities to inflict " forfeitures and other pen- 
alties." The States were also advised to make these 
bills a legal tender, to make provision for the redemp- 
tion of the first six millions, to avoid the further 
emission of their own local bills, and to take meas- 
ures to draw in those already out.^ The loan sys- 
tem failing, Congress reluctantly had recourse to the 
press which printed the paper money, and the next 
ten millions increased the depreciation decidedly. 
The paper was still lawful tender in payment of 
debts ; and notwithstanding the confusion of con- 
tracts, the universal high prices, the sufferings of the 
poor, and the gains of the artful and unscrupulous, 
Congress felt obliged to give currency to the most 
wretched sophistries, to refer the existing deprecia- 
tion mainly to "want of confidence," and to laud 
the paper as the only kind of money " which cannot 
make to itself wings and fly away I It remains with 
us, it will not forsake us, it is always ready at hand 
for the purposes of commerce, and every industrious 
man can find it ! " The rest of the story is soon 
told. Before the end of the year 1779, the remain- 
der of the two hundred millions, which, in the vain 
hopes of stopping the depreciation. Congress had 

1 Hildreth's United States, chap. 35. 



324 ELEMENTS OF POLITICAL ECONOMY. 

beforehand announced as the limit of the issues, 
was put out, and the press was allowed to rest. The 
value of the money was then about 381 for one. 
The States were now advised to repeal all laws mak- 
ing the bills a legal-tender, and the scheme of the 
" new tenor " was devised, by which the old bills were 
to be drawn in at the rate of forty for one, and funded 
in government bonds bearing interest. This was the 
finishing blow, and the paper soon dropped out of 
circulation altogether. Just before the Revolutionary 
army in camp at Newburgh had combined to refuse 
it, and its circulation was wholly stopped, it ex- 
changed for cash at the rate of one thousand for one. 
One thousand for one is 99i^o per cent, below par, and 
the prices of commodities were as ridiculously high 
as the value of the paper was pitifully low. A man 
in New England or New York would pay five hun- 
dred dollars for his dinner, and never ask the landlord 
to reduce the bill. I heard the story in my childhood 
of a certain gentleman well known in those parts, 
who stuffed his sulky-box with continental bills and 
then sallied forth to purchase a cow! 

At this juncture the rudiments of a better system 
appeared. For nearly a hundred years the Bank of 
England had been issuing paper payable on demand 
in gold and silver. Alexander Hamilton had been 
a clo'se student of English history and of English 
finance, and he conceived that the same thing might 
be done with advantage in America. In 1780, when 
he was only twenty-three years old, he wrote a letter 
to Robert Morris, a wealthy and influential member 
of the Continental Congress, and afterwards the 
Continental financier, in which, after showing the 



ON CUERENCY IN THE UNITED STATES. 825 

causes of the depreciation of the currency, and the 
necessity of a foreign loan, he furnished a matui'ed 
plan of a bank, by means of which the loan might 
be so applied as to reestablish the public credit and 
become the basis of a redeemable currency. This 
was, as I believe, the first suggestion of a banking 
institution for America. Hamilton's idea was briefly 
this : Public credit there was none ; an established 
government there was none ; the Continental Con- 
gress was exercising the unlimited functions of a 
revolutionary government ; under these circumstances 
the only way to create public credit was to unite 
with it the private interests of moneyed men. Es- 
tablish then a bank which shall be the fiscal agent 
of the government; obtain, if possible, a foreign 
loan, and deposit it in cash in the bank ; let half the 
stock of the bank be subscribed by wealthy men, 
who can reasonably look for a fair profit on their 
investment ; let government hold the other half and 
have half the profits ; then let the bank issue bills on 
its cash basis, consisting of the loan, the private sub- 
scriptions, and the product of the Continental taxes 
as they are gradually paid in. Thus the bank, and 
all subscribers to its stock, and all holders of its bills 
would be directly interested to uphold the govern- 
ment and its credit. Community would be equally 
benefited, since it would have a relatively sound 
paper for ordinary commercial purposes. 

Mr. Morris found his duties as Continental finan- 
cier sufficiently embarrassing; and in the fall of 
1781 brought forward a scheme for a national bank, 
partially embodying on a small scale the ideas of 
Hamilton. Congress sanctioned the plan, and the 



826 ELEMENTS OF POLITICAL ECONOMY. 

Bank of North America, the first bank in this coun- 
try, was established in Philadelphia. Mr. Morris, in 
behalf of the general government, subscribed nearly 
two thirds of the capital stock of ^400,000, and nat- 
urally took the entire control of the institution. The 
reason why individuals subscribed so little is to be 
found in the distrust with which paper money of all 
kinds had come to be regarded. Capitalists did not 
believe there would be any dividends, and the peo- 
ple were afraid the paper vv^ould depreciate in their 
hands. Under these unfavorable circumstances the 
bank went into operation in January, 1782. Every 
effort was made to produce a public sentiment favor- 
able to the credit of the bank, and its bills were the 
first paper handled by Americans which was con- 
vertible into coin at the pleasure of the holders. 
Beinff made receivable at the Federal and State treas- 
uries in payment of taxes and duties, and being 
cautiously issued at first, the bills soon came into 
such circulation that the bank was able to declare 
dividends on its stock from twelve to sixteen per 
cent, per annum. Who ever heard of capitalists 
who could resist sixteen per cent ? The bank 
opened its books for new subscriptions, and the 
stock went up without difficulty from $400,000 to 
$2,000,000. 

We must here dismiss the Bank of North Amer- 
ica, the parent of all our institutions of the kind, 
with the remark that, although it was chartered by 
the old Congress as a national institution, such 
doubts were entertained of the competency of that 
body to incorporate an institution within a State, 
that a charter was soon after procured from the 



ON CURRENCY IN THE UNITED STATES. 327 

legislature of Pennsylvania ; and also, that its con- 
nection with the Continental treasury ceased, on the 
retirement of Mr. Morris from the office of financier. 
It continued, however, as a State bank ; and it flour- 
ishes still in a green old age among the banking con- 
cerns of the Quaker City. 

Till Mr. Morris's Bank of North America com- 
menced operations January 4th, 1782, all the paper 
that had been issued in the country, whether by the 
colonies as such or by the central authority repre- 
sented at first by the revolutionary government and 
afterwards by the confederation, was irredeemable 
paper, and illustrated the universal financial law 
that such paper, unless issued under very favorable 
circumstances and strictly limited in quantity, will 
depreciate in spite of everything. The bills of the 
Bank of North America were convertible into gold 
and silver at the pleasure of the holders, and they 
mark, therefore, an epoch in the monetary history of 
the country. Some silver coins had been issued in 
Massachusetts as early as 1652, and continued to be 
struck at the colonial mint for about thirty years, but 
the pieces all bear the dates of 1652 or 1662 ; and 
these pieces, now known and prized as the " old pine- 
tree coinage," were the only public coins of any de- 
scription minted in the country itself until after the 
close of the Revolutionary war. They were shillings, 
sixpences, threepences, and twopences. Both silver 
and copper coins were, however, minted in England 
for the use of the colonies ; and in 1722 a patent 
was issued by George I. to one William Wood to 
make coins for colonial use out of pinchbeck, in pur- 
suance of which he had the conscience to make thir- 



328 ELEMENTS OF POLITICAL ECONOMY. 

teen bright shillings, or thereabouts, out of a pound 
of brass. It is refreshing to add that the colonists 
had the sense and spirit utterly to reject Wood's 
money. 

On the 15th of January, 1782, Mr. Morris pre- 
sented to the old Congress the first plan of a deci- 
mal coinage ever brought forward. There are three 
possible ways of arranging a decimal system of 
coinage : first, to have a very small unit, and then 
proceed only by decimal multiplication ; second, to 
have a very large unit, and then proceed by deci- 
mal division only; and third, to have a moderate 
unit, and then proceed decimally in both directions. 
Mr. Morris proposed as the unit, but not as a coin, 
a quarter grain of pure silver. One hundred of these 
units, alloyed with two grains of copper, were to be 
the lowest silver coin, weighing 27 grains, and called 
a cent; 500 of them were to make a quint; and 
1,000 of them a mark. Mr. Morris afterwards mod- 
ified this plan, thinking the unit too small, and pro- 
posed the pound as the unit of account, assuming it 
to be 125. 6f/. sterling, and calling that 1,000, divided 
it decimally into the shilling 100, the penny 10, and 
the doit 1. As a table of coins, he proposed of gold 
the crown 1200 doits, the half-crown 600 doits ; of 
silver the dollar 300 doits, the shilling 100 doits, the 
groat 20 doits ; and of copper the copper doit. In 
all this there is a recognition of the advantages of 
the decimal system for purposes of multiplication, 
and an equal recognition of the advantages of the 
duodecimal system for purposes of division. 

Mr. Morris resigned as financier in 1784, and the 
whole subject was then referred to Mr. Jefferson, 



ON CURKENCY IN THE UNITED STATES. 329 

whose decimal plan was adopted by the old Con- 
gress in 1786, and consisted of both denominations 
and coins called eagles, dollars^ dimes, and cents. 
Each of these was to be subdivided into halves, and 
the dime was also to be doubled. In this scheme, 
accordingly, the binary system is recognized equally 
with the decimal. In 1786 also, an actual coinage 
of copper cents, a denomination first suggested by 
Morris, but first proposed by Jefferson as the 100th 
of a dollar, took place under State authority in Ver- 
mont, in Connecticut, and in New Jersey ; and Con- 
gress also authorized the establishment of a mint, 
and the next year contracted for 300 tons of Federal 
copper cents to be struck. These cents were coined 
at the Connecticut mint in New Haven, and a few 
of them at the Vermont mint in Rupert. 

When government went into operation under the 
present constitution, in 1789, the action of the old 
Congress was reported to the new, and the matter 
was referred to Alexander Hamilton, the first Sec- 
retary of the Treasury, He made an elaborate re- 
port on the Mint and the Coins,i adopted the dollar 
as the unit, but claimed that it should not be at- 
tached to gold or silver exclusively but to both, pro- 
posed that 24.75 grains of pure gold, or 371,25 grains 
of pure silver should be a dollar, and that the alloy 
in both cases should be xVth, making the unit 27 
grains of standard gold and 405 grains of stand- 
ard silver. The Act of 1792 established a mint, 
and regulated the coins substantially in accordance 
with the recommendations of the Secretary. The 
coins were to be the eagle, the half-eagle, and the 

1 See Hamilton's Woi^lcs, yol. iii. p. 149, et seq. 



330 ELEMENTS OF POLITICAL ECONOMY. 

quarter-eagle in gold ; the dollar, half-dollar, quarter- 
dollar, dime, and half-dime in silver; the cent and 
half-cent in copper. The weight of the eagle was 
to be 270 grains, alloyed one part in twelve; and 
that of the silver dollar 416 grains, alloyed so as to 
be .8924 fine. The subdivisions of these coins were 
to be in all respects proportional to their units. It 
will thus be noticed that the credit of first introduc- 
ing a decimal system of money is due not to one 
man but to three ; that all three of the possible ways 
of arranging such a system were recommended in 
turn, and the third finally adopted ; and that, while 
the undoubted superiority of the decimal system in 
an upward scale is fully recognized, the natural ten- 
dency of men's minds to subdivide into halves, quar- 
ters, eighths, and so on, rather than into tenths, hun- 
dredths, and so on, is recognized also. Eighty years 
have not yet naturalized among us the dime and 
mill, nor expelled the York shilling, the eighth of a 
dollar. Dollars and cents make an admirable money 
of account, but the decimal subdivisions of these 
are unnatural and have never come into much use. 
The true convenience is reached through a combina- 
tion of the binary and decimal systems. The half- 
dollar is more convenient than the dime, and the 
quarter than the mill ; and I think that coins of the 
eighth and sixteenth of a dollar would perhaps be 
useful in connection with those we now have. 

It may be asked how we came to have the dollar 
as the unit of our monetary system. The word 
dollar is derived from a German word which means 
valley^ and was first applied to coins in the mining 
region of Bohemia, at a place called Joachimsthal, 



ON CURRENCY IN THE UNITED STATES. 331 

where silver pieces of one ounce weight were coined 
about 1520, and were called Joachimsthaler, and 
then for shortness thaler, whence dalera in Span- 
ish, and in English dollar. The thaler remained a 
German money of account till 1872, and the Span- 
ish milled dollar became so famous in the world of 
commerce, and so familiar to our fathers in their 
dealings with the West Indies and the Spanish 
American colonies, that our statesmen recommended, 
and our Congress adopted it as the best known and 
most convenient unit of money. It is hardly neces- 
sary to add that dime is a corruption of the Latin 
decern, ten ; that cent is a contraction of the Latin 
centum, hundred ; and that mill is a contraction of 
the Latin mille, thousand. 

There was a curious debate in Congress at the 
time as to the devices which the coins should bear. 
As the bill came from the Senate, where it orig- 
inated, the gold and silver pieces were to have on 
one side the figure of the eagle, which the Continen- 
tal Congress long before had adopted as the national 
emblem, and near this, the legend " United States 
of America." This was for the obverse of the coin, 
and so far nobody had any objection. For the re- 
verse, the bill proposed that, in accordance with the 
usages of all nations from the time of the earliest 
known coinage, the impression or representation of 
the head of the President of the United States for 
the time being, together with his name, order of suc- 
cession in the presidency, and the date of the coin- 
age, should be stamped. This was strongly objected 
to in the House, as savoring of monarchy. The 
President's head on the coin was deemed by some a 



332 ELEMENTS OF POLITICAL ECONOMY. 

dangerous thing for the republic, and the proposal 
led to a sarcastic and even acrimonious debate, and 
was at length defeated in the House by a vote of 
twenty-six to twenty-two, in which the Senate was 
afterwards obliged to concur, and a proposition made 
by Key of Maryland was carried, to substitute a fig- 
ure of Liberty instead of the obnoxious head of the 
President ; but under precisely what sort of a figure 
to represent Liberty was then the difficulty, and at the 
next session Elias Boudinot of New Jersey, after- 
wards the director of the mint, endeavored to get 
substituted for the emblematic figure of Liberty the 
head of Columbus, but in vain ; the Republican party 
was bound that the figure of Liberty and no other 
should go on the coins, and it went on, and we have 
here the history of that benignant looking lady, 
whose pretty face we used to see familiarly enough 
before the war, and whose acquaintance we hope to 
resume in the good time coming. 

The Mint of the United States was established at 
Philadelphia in 1792, and the first federal coins of 
silver were issued in 1794, of gold in 1795. While 
it was still doubtful where the ultimate seat of the 
national government would be placed, the citizens of 
that beautiful city were strongly in hopes of being 
able to persuade Congress permanently to abide in 
their -town, in which the old continental body had 
first met, in which Independence had been declared, 
and which, more than any other, was popularly re- 
garded as the head-quarters of the national Union. 
A notable instance of log-rolling legislation, the first 
in our history, transferred the capital of the country 



ON CURRENCY IN THE UNITED STATES. 338 

to the banks, of the Potomac; but the good people 
of the Quaker City have nevertheless always retained 
the Mint, as a memorial of their earlier position in 
the history of the government. By the law of 1873, 
the mints at Philadelphia, San Francisco, Carson, 
and Denver, become separate establishments, under 
a bureau of the Treasury Department. The term 
"branch mint" is abolished; and the assay offices 
for the stamping of bars, as well as the mints for the 
manufacture of coin, are responsible to this bureau, 
whose chief officer is styled the Director of the Mint. 
This designation was originally given to the chief 
officer at Philadelphia; and David Rittenhouse, an 
ingenious and self-taught mathematician, who had 
run several years before, by the help of instruments 
all of his own construction, the most difficult part 
of Mason and Dixon's line, was the first appointed 
to this post. 

The act of Congress established the ratio of one 
to fifteen as the relative value of gold in silver to be 
maintained at the Mint; but, from this clause of the 
law, there followed important consequences, which 
were not foreseen, since that was not, at least in 
America, the true ratio of their value at that time, 
and being a decided under-valuation of gold, the 
gold coinage came into very little circulation. It 
was really worth more by the ounce than fifteen 
ounces of silver, was accordingly worth more out of 
the circulation than in it, and was therefore exported 
in preference to silver in payment of foreign bal- 
ances, especially after France had changed the rela- 
tive legal value to one to fifteen and one half. 
Thereafter an ounce of ";old was worth in silver three 



834 ELEMENTS OF POLITICAL ECONOMY. 

and one third per cent, more abroad tlian here, and 
of course the gold refused 1o circulate in the home 
currency, giving us another neat illustration of the 
economical law that the cheaper money will push 
the dearer out of circulation. 

After a long while the attention of Congress was 
called to this circumstance, and a law was passed in 
1834 substantially rating gold in relation to silver at 
one to sixteen. The w^eight of the eagle was re- 
duced from 270 grains to 258, and the alloy increased 
to one part in ten from one part in twelve. This 
increased at one jump the legal valuation of gold 
6.58 per cent, as compared with silver, which re- 
mained as before. But this in turn was an over- 
valuation of gold ; and the working of the natural 
law became immediately apparent, by which the cur- 
rent of the metals was reversed, silver now passing 
in preference to Europe to liquidate the balances of 
trade, and gold beginning to come to the United 
States, where it was now 3.22 per cent, dearer in 
silver than in Europe. In 1837, the standard of 
nine tenths fine was applied to silver also, and 
this increased fineness necessitated a change in the 
weight of the silver coins, if the relation of one to 
sixteen was to be maintained. Accordingly the 
weight of the silver dollar was reduced from 416 
grains to 412^, making just 371.25 grains of tine 
silver in the dollar. There has been no change in 
the .gold dollar since 1834, and no change in the 
silver dollar since 1837, but the smaller silver coins 
have been still further reduced in weight, as we shall 
see. 

In 1853 the disadvantages of Hamilton's double 
standard had become apparent; experience had 



ON CURRENCY IN THE UNITED STATES. 835 

proven that the relative value of the two metals was 
not constant but variable ; and it was then deter- 
mined to make gold alone the legal tender, except in 
sums below $5, and to reduce the weight of the 
silver half dollar and its subdivisions, so that their 
nominal value should be considerably above their 
real value, and their exportation be thus prevented. 
The half dollar was reduced from 206^ to 192 grains, 
and the smaller coins proportionally. A silver dollar 
weighs 371.25 grains, a dollar in parts weighs 345.6, 
and accordingly a dollar is worth 7.42 per cent, more 
than a nominal dollar's worth of the smaller pieces. 
The relative value of gold in silver is now 1 to 15.6 ; 
a gold dollar, therefore, weighing 23.22 grains pure, 
is worth 2.43 per cent, less than a silver one, and 
4.81 per cent, more than a dollar in small silver. 
The result of these measures was to establish gold 
as the standard of value, and to make silver sub- 
sidiary to that. The refusal of the silver piece to 
circulate under these circumstances is another illus- 
tration of the law already so often referred to. A 
new silver trade-dollar is authorized by the law of 
1873, for export purposes only. 

At different times new coins have been added to 
our series, but they have not proved to be of much 
importance ; of gold, the double-eagle, the three- 
dollar, and the one-dollar piece; of silver, only the 
three-cent piece ; and of copper, the five, three, and 
two-cent pieces. By the law of 1873, the two-cent 
piece is abolished. The one-cent piece is 95 parts 
copper and 5 tin-zinc ; the three and five cent pieces 
are 75 parts copper and 25 nickel; and debts of four 
cents can be paid in one-cent pieces, of sixty cents 



336 ELEMENTS OF POLITICAL ECONOMY. 

in three-cent pieces, and of one dollar in five-cent 
pieces. The last are minted after the French metric 
system, weighing precisely five grammes, and five of 
them laid along in order measuring exactly a deci- 
metre in length. This was the first official recogni- 
tion, embodied in act, of the excellence of the metric 
system. 

Besides the Bank of North America, two others 
had been established, the Bank of New York in New 
York, and the Bank of Massachusetts in Boston, 
when the present government went into operation in 

1789. Their circulation was mostly confined to the 
cities in which they were located. In pursuance of 
the duty of his office as Secretary of the Treasury, 
Hamilton also presented to Congress in December, 

1790, his celebrated report, recommending the estab- 
lishment of a Bank of the United States. In this 
report, which at once gave Hamilton a European 
reputation, two points were specially argued : first, 
that such an institution would afford through its bills 
great facilities to trade and to domestic exchanges ; 
and, second, would furnish the new government a 
convenient paper medium for its monetary transac- 
tions, and be a resource for temporary loans. The 
first point respected the people, the second the gov- 
ernment. 

There can be no doubt, I think, that in the circum- 
stances of that time a national bank was expedient 
and beneficial. There was then no confidence, no 
credit, no currency, and no commercial relations es- 
tablished with foreign nations by which gold and 
silver could flow into the country. As an institution 
of loan, the bank gave credit to the extent of its 



ON CURRENCY IN THE UNITED STATES. 337 

means to all who had good security to offer. As an 
institution of circulation, it furnished a convenient, 
a convertible, and a national money. As a govern- 
mental fiscal agent, government could borrow of it 
on an emergency, and pay at its leisure from the 
proceeds of the imposts and taxes. The fullest ac- 
knowledgment, however, of the benefits of such an 
institution at that time does not at all commit one 
to the defence of any such institution now. Cir- 
cumstances have utterly changed. No well-estab- 
lished national government can afford to add to its 
many and higher functions the delicate duty, so 
much more appropriate to private bankers, of loan- 
ing money to the people on interest according to its 
notion of their solvency ; and, in a republic especially, 
where hostile parties alternately administer the gov- 
ernment, loans would be sure to be made for parti- 
san purposes, and corruption find the bank a ready 
tool. 

The constitutionality of Hamilton's plan was 
stoutly denied in Congress. The first-rate abilities 
and growing reputation of that eminent statesman 
had already awakened jealousies both in Congress 
and in the cabinet. Nevertheless, a bill, in substan- 
tial accordance with the views of the Secretary, 
passed both houses by large majorities. Washing- 
ton, before signing it, required the written opinion 
of his cabinet on the question of constitutionality. 
Hamilton and Knox took the affirmative; Jefferson 
and Randolph the negative ; the President, as often, 
sided with Hamilton, and signed the bill. 

On New Year's day, 1853, I had the great per- 
sonal pleasure of calling on the widow of Alexan- 

22 



838 ELEMENTS OF POLITICAL ECONOMY. 

der Hamilton, who survived him just fifty years. 
Turning the conversation on her husband's connec- 
tion with the government, the old lady remarked 
with enthusiasm, — " My husband gave you a bank. 
Jefferson thought we ought not to have any bank, 
and Washington rather thought so, too; but my hus- 
band said we must have a bank ; and one day he 
said to me, ' My dear, you must sit up with me to- 
night, and write for me ;' and I sat up all night, and 
I wrote it out with my own hand, and the next 
morning he carried it to Washington, and we had a 
bank ! " This last was pronounced not without ex- 
ultation. 

With a charter that was to run twenty years, with 
a capital stock of $10,000,000, $8,000,000 of which 
was subscribed by individuals, and $2,000,000 by 
the United States, and the whole of which was sub- 
scribed, with a surplus, within a few hours, the first 
United States Bank went into operation at Phila- 
delphia, in July, 1791. Notice this feature of the 
stock. Hamilton had just before persuaded Con- 
gress to assume the State debts incurred in the war 
of the Kevolution, and to fund them, together with 
the certificates of the public debt, into one new and 
compact debt. Three fourths of the subscription of 
individuals to the bank stock must be in these new 
government stocks which bore six per cent. The 
demand for them, thus created, brought them in- 
stantly up to par ; so that the bank was made a 
means, incidentally, of establishing the credit of the 
United States, — all its paper was now at par. This 
splendid success of Hamilton's financial schemes, 
logether with the unexpected income from the new 



ON CURRENCY IN THE UNITED STATES. 339 

tariff, accounts in part for the immense popularity 
of the man; and justifies the strong expression of 
Daniel Webster, who said, on one occasion, that 
Alexander Hamilton raised the public credit of the 
United States from the dead. 

During twenty years, the term of its charter, the 
operation of the first United States Bank appears 
to have been healthful and beneficent. It furnished 
a paper money secured by government stocks and 
by cash that was current at a uniform value all over 
the country ; its loans, under the circumstances of 
the time, gave a sharp spur to industry and com- 
merce ; while its dividends to stockholders never fell 
below eight, and frequently rose to ten per cent. It 
is not to be wondered at, therefore, that as the time 
approached for the charter to expire, the stockhold- 
ers were anxious for a renewal. They applied for 
such renewal, offering to pay the government a mill- 
ion and a quarter for the privilege of continuance. 
It was alleged against the bank, on the other hand, 
that the stock was now largely owned by foreigners, 
which was true ; and that the directors had some- 
times made, or withheld, loans, for party purposes, 
which was doubtful. The real cause of the opposi- 
tion to the renewal of the charter was this : Instead 
of the three State banks in existence when the na- 
tional institution was chartered, there were now 
(1811) eighty-eight State banks, in some of which 
the States as such held stock. These banks and 
their friends supposed that it would be for their 
interest that the national bank should go out of be- 
ing; that, in that case, they should obtain the cus- 
tody and management of the national funds, and 



S40 ELEMENTS OF POLITICAL ECONOMY. 

furnish the country the currency, which the national 
institution had furnished. The charter was defeated, 
in the House by one vote, and in the Senate by the 
casting vote of the Vice-President, George Clinton. 
The bank was obliged to wind up its affairs. It did 
so speedily and honestly. This was in 1811. 

Undoubtedly the paper of the first national bank 
was very fair money, and certainly superior to the 
bills of the new State banks, for the creation of 
which there was a sort of mania in the country so 
soon as it was ascertained that the national institu- 
tion could not be rechartered. Many of these went 
into operation on the strength of little or no bona 
fide capital. They issued their notes freely, and 
the chasm caused by the withdrawal of the national 
circulation was soon filled up, and more too. As a 
necessary consequence, the whole circulating me- 
dium became depreciated, and the currency came 
into dreadful disorder throughout the country. In 
the fall of 1814, there was a general stoppage of all 
the banks in the United States, except those in New 
England. The notes of the New York city banka 
were ten per cent, below par; those of Philadel- 
phia, eighteen ; of Baltimore, twenty ; of Pittsburg, 
twenty-five. All this illustrates the simple financial 
truth, that money is not a commodity of which an 
unlimited quantity can be absorbed by business, but 
is an instrument for a certain specific purpose, — 
namely, to facilitate the exchange of existing com- 
modities and of services all ready to be exchanged, 
and only waiting for the presence of the medium 
to consummate the transfer; and whenever more 
than enough for this purpose is put out, whether it be 



ON CURRENCY IN THE UNITED STATES. 341 

specie or paper, a diminution in value of every part 
of it is inevitable; on the same principles precisely 
as, w^hen the market is permanently overstocked 
with sewing-machines, there will be an inevitable 
decline in their value. Money is good for the pur- 
pose for which it was invented, and useless for any 
other. 

In this state of things Mr. Dallas, then Secretary 
of the Treasury, recommended to Congress the estab- 
lishment of a new United States Bank, modelled 
after the first, with a charter for twenty years, with a 
capital stock of ^35,000,000, the bank to pay the 
government a bonus of a million and a half for the 
privilege of coming into being. It was thought that 
a strong central and national institution, on which 
the State banks, now increased in number to two 
hundred and forty-six, might lean for support, would 
enable them shortly to resume specie payments, and 
to go on thereafter on better principles. The bill 
organizing the bank was engineered through the 
House by John C. Calhoun. It went into operation 
in 1816, just after the close of the last war with 
England, when the reviving enterprise and enlarged 
business of peace seemed to open up before it a 
prosperous career. 

The new bank was not, however, at first, fortunate 
in its management. It pushed its paper into circu- 
lation with reckless eagerness. In the course of one 
month it increased its discounts from three to twenty 
millions, and in nine months its discount line was 
thirty-three millions. The results were what might 
have been expected, — prices universally high, a spirit 
of speculation everywhere rife, and gold leaving the 



Si2 ELEMENTS OF POLITICAL ECONOMY. 

country by shiploads. The bank soon fell into 
difficulties, and public opinion turned more or less 
against it. Although under the abler and more 
careful management, first of Langdon Cheves, and 
then of Nicholas Biddle, the bank recovered its sta- 
bility, it never enjoyed quite the same confidence 
and credit as the first bank. 

This was not wholly its own fault ; for in 1829, 
seven years before its charter was to expire, Andrew 
Jackson commenced his famous contest with the 
bank, which he kept up without intermission till the 
charter expired in 1836. Under this presidential and 
consequent congressional fire, the bank can hardly 
be said to have had a fair chance. Andrew Jackson 
had sworn its death by the 'tarnal — his usual oath — 
and Andrew Jackson was not a man to be thwarted. 
In his annual message in 1829, he gave the directors 
fair warning that there would be " constitutional 
difficulties " in the way of their securing any exten- 
sion of their privileges, and in 1832 he vetoed the 
bill to recharter the bank. The next step was to 
remove from the custody and management of the 
bank the public moneys. Three years before the 
charter expired he requested Mr. McLane, the Secre- 
tary of the Treasury, to remove the national funds 
from the custody of the bank, and to place them in 
certain selected State banks. Mr. McLane declined 
to order the removal. Whereupon Mr. Duane of 
New York was appointed to the treasury. But Mr. 
Duane, no more than his predecessor, could see his 
way clear to remove the deposits. When made to 
understand that it was the determination of the 
President to have them removed at all hazards, he 



ON CUERENCY IN THE UNITED STATES. 343 

explicitly refused to lend himself for the purpose. 
The President removed Mr. Duane, and appointed 
Roger B. Taney, the late Chief Justice, as Secretary 
of the Treasury. He proved more flexible to the will 
of power, and immediately gave the required order. 
The consequences of this step in the circumstances 
were immense and mischievous. The discount line 
of the bank was at the moment over $60,000,000. 
The public deposits were $10,000,000. The sudden 
withdrawal of this sum affected credit and disar- 
ranged business to a remarkable degree, and caused 
intense excitement all over the Union. 

The next movement in the " great experiment," as 
it was sarcastically called in the politics of the day, 
was the issue of the famous specie-circular, which 
directed the receivers of the public money to take 
nothing but gold and silver in payment of the public 
lands. Speculators and others had been making 
large purchases of western lands, expecting to pay 
in paper money. The specie-circular came upon 
them like a clap of thunder. Their consternation 
was vast, and the circular, coming as it did, shortly 
after the removal of the deposits, made confusion 
worse confounded. 

General Jackson went out of office, and the second 
bank went out of being the same year ; but the 
inaugurated movement was completed by Mr. Van 
Buren, who effected the complete divorce of the 
government from all banks and fiscal agents what- 
ever, first, by directing the State banks which now 
had the keeping of the public moneys, to distribute 
them as surplus revenue among the States ; and, by 
the sub-treasury scheme, in pursuance of which the 



344 ELEMENTS OF POLITICAL ECONOMY. 

United ^States received in payment of all dues, and 
paid out in all disbursements, gold and silver only. 
I believe in gold and silver money, or their equiv- 
alent in representative paper which can be instant- 
ly converted into them, and do not question the 
patriotic aims of the administrations concerned, but 
there was something headlong and violent in this 
transition from the traditional policy of the govern- 
ment to the new system. 

From 1836 to 1862 there was no national money 
in the United States, except the coin ; the paper 
currency was furnished by a number, increased at 
last to over fifteen hundred, of joint-stock banking" 
companies, under the sole authority of the States. 
These, under various and often conflicting regula- 
tions, manufactured and issued money for the peo- 
ple. This money, as a whole, was never a safe, a 
uniform, an economical currency. It was subject to 
alternate contractions and expansions which spoiled 
it as a measure of value. It was never able to stand 
the shock of the commercial crises which it power- 
fully contributed to bring on. Money is an imple- 
ment, and a costly implement, and the functions it 
has to perform cannot be performed by cheap, penny- 
wise, pound - foolish substitutes. 

When Secretary Chase assumed the Treasury De- 
partment in the spring of 1861, the state of the coun- 
try, and, of consequence, the state of the finances, 
were appalling. Mr. Buchanan's administration had 
just been trying to borrow a few millions of dollars 
of the people, and had only succeeded in securing a 
very small sum, and that at the enormous rate of 
twelve per cent, interest. The clouds of war which 



ON CURRENCY IN THE UNITED STATES. 345 

had been gathering black and sullen all the winter, 
soon broke in wrathful peals over the head of the 
new administration. The country must be defended, 
as well as the ordinary expenses of the government 
met ; an army must be raised, equipped, put into the 
field, and paid. We do not propose to follow the 
Secretary in his general financial embarrassments, 
expedients, and resources ; but it is needful to our 
present purpose to say that, owing to the unexpected 
delays and disasters of the war, and to the conse- 
quent want of confidence in the public mind, he 
found it extremely difficult to borrow the sums ne- 
cessary to be had in order to meet the expenditures 
of the government ; and that in his first annual 
report to Congress, in December, 1861, he recom- 
mended, principally for the sake of facilitating the 
negotiation of loans, the organization of banking 
associations, whose circulation should consist only 
of notes, uniform in character, furnished by the gov- 
ernment, and secured as to convertibility into coin 
by United States bonds deposited in the treasury. 
It is clear that if such associations should be formed, 
it would make a market for the national bonds to 
the extent in which they should invest their capital 
stock in them as security for their circulation. Above 
all things, at that time the United States wanted to 
borrow money. It must borrow or perish ; and 
therefore a national banking system, based for secu- 
rity on the national debt, would open a market for 
some hundreds of millions of the evidences of that 
debt, and put a corresponding sum of immediately 
available funds into the hands of the government. 



346 ELEMENTS OF POLITICAL ECONOMY. 

This proposal of the Secretary, involving, as it did, 
the winding up of the State banks as such, found at 
first but little favor in Congress or among the people. 
The banking interests of the eastern and middle 
States, particularly of the State of New York, from 
whose State bank system the idea was mainly and 
by acknowledgment borrowed, were especially hostile 
to the scheme. In his second annual report, in 
December, 1862, the Secretary iterated his recom- 
mendation, and enforced it at length by arguments 
drawn from the necessity of effecting immediately 
more extensive loans, from the character of the cur- 
rency for soundness and uniformity thus furnished to 
the people, from the convenient agencies which such 
banks would furnish for the deposit of public moneys, 
and from the firm anchorage which such a system 
would give to the union of the States. These argu- 
ments, which found a response especially emphatic 
from the Western States, coupled with the assurance 
of the Secretary, that, if Congress should concur in 
his views, though conscious of the great difficulty 
which vast, sudden, and protracted expenditures im- 
posed on him, he thought he should still be able to 
maintain the public credit and provide for the public 
wants, induced Congress to frame and pass " An act 
to provide a national currency secured by a pledge 
of United States stocks, and to provide for the circu- 
lation and redemption thereof." The act was ap- 
proved by the President February 25, 1863. 

Every bank organized under it invests its own 
capital stock in the bonds of the United States, 
bearing interest. These bonds are transferred to 
an officer of the treasury, called the comptroller, at 



ON CURRENCY IN THE UNITEO STATES. 347 

Washington, who holds them as security for the 
redemption of the bills of such bank, but who pays 
the interest on them to the bank itself, so long as 
the bank redeems its bills promptly and violates no 
provisions of the organic banking law. Ninety per 
cent, of the amount of such bonds thus deposited 
with the comptroller, provided the bonds be esti- 
mated at par value and bear interest at a rate not 
less than five per cent., is then furnished by the 
treasurer to the bank in circulating notes, engraved 
and registered by 1?he United States ; unless the cap- 
ital stock of the bank be more than $500,000 and 
less than $1,000,000, in which case only eighty per 
cent, of the capital is furnished in notes ; and if the 
capital be between $1,000,000 and $3,000,000, only 
seventy-five per cent.; and over $3,000,000, sixty per 
cent. These notes thus received by the banks, they 
issue to the people in ordinary loans and payments, 
and they are required by the law to keep on hand 
at all times 25 or 15 per cent, of their aggregate 
average circulation and deposits in lawful money of 
the United States, with which to redeem their notes 
on presentation. Thus the convertibility of the 
notes is dependent first on the solvency of the as- 
sociation, and, if that fails to redeem them, they 
are speedily redeemable, after certain formalities are 
gone through with, at the treasury of the United 
States; and so many of the bonds belonging to 
such bank, deposited with the comptroller of the 
currency as security for the redemption of the notes, 
are then to be sold as shall reimburse the United 
States for such redemption ; so that it is almost im- 
possible under the law that the bill-holders of any 



348 ELEMENTS OF POLITICAL ECONOMY. 

national bank can ever suffer any loss. The United 
States holds the capital of the bank in its own 
hands, and is thus enabled to guarantee the con- 
vertibility of the bills. At the same time the system 
secures the manifold advantages of private capital, 
private enterprise, and personal sagacity and integ- 
rity, in the matter of loaning money, securing depos- 
its, and general management of the banks. 

The superiority in every respect of this scheme 
of banking to the fast and loose system which pre- 
vailed in this country so long, is very apparent. In 
the first place, perfect publicity of the affairs of 
every bank is provided for in the organic law, and 
cannot be evaded. The banks are obliged to furnish 
a statement to the comptroller, under oath, of their 
exact condition, whenever notified by him to do so; 
and the dates, when this will be done, cannot be 
anticipated by them ; and the comptroller is bound 
to publish from time to time abstracts of these re- 
ports ; so that everybody can know the state of 
each bank in particular, as well as the state of 
the whole circulation. In the second place, the 
whole amount of the circulation cannot be increased 
at the will of the banks or the will of the comp- 
troller, or in any other way except by an act of 
Congress authorizing such increase ; so that the sys- 
tem is not so liable to those sudden contractions 
and expansions which have been the bane of our 
paper money hitherto. In the third place, the gov- 
ernment pledges itself to receive these bills for taxes, 
excises, and all other dues, except customs' duties ; 
and makes them legal tender in all payments which 
itself has occasion to make, except the interest and 



ON CURRENCY IN THE UNITED STATES. 349 

principal of the public debt. If, to these provisions, 
there be added another, requiring all the banks to 
redeem their bills in New York, as well as at their 
own counters, the bills will be undoubtedly uniform 
in value all over the country, and debts can be paid 
by them through the post-office, or otherwise, with- 
out the mediation of any bank or the payment of 
exchanges. In the fourth place, it is to be noticed, 
that the United States absolutely guarantees the 
full payment of these notes, not simply as a trustee 
holding securities for the purpose, but as a principal 
pledging the public faith.^ In the fifth place, besides 
the absolute security of ultimate redemption, the 
ratio of lawful money required to the aggregate cir- 
culation and deposits is much higher than has hith- 
erto prevailed in practice throughout the countiy. 
The ratio required of all the banks in seventeen of 
the principal cities of the Union is twenty-five per 
cent, and of the banks elsewhere fifteen per cent. 
It is found that this percentage is on the average 
more than kept up.^ Add to these reasons this other, 
that the homogeneousness of the money circulating 
among them, in connection with a common creditor- 
ship towards the United States Government, is an 
additional bond binding the States and the people 
together, and tending powerfully to neutralize the 
centrifugal forces which are always at work in large 
societies and governments. 

But we shall get an idea too favorable to the 
national banking system, unless we look also at its 
dangers. In the first place, the money which these 

1 Wnll-er^s Science of wealth, page 233. 

2 Rtport Comptroller of the Currency, 1872, pp. xxii. xxiii. 



350 ELEMENTS OF POLITICAL ECONOMY. 

banks circulate is credit- money, and is liable in some 
degree to the disorders which are inseparable from 
every form of credit. Credit is not payment, but a 
promise to pay. The promise may be good, it may 
be sure to be fulfilled ; but it is not, and never can 
be made, the same thing as fulfillment. These bills 
bear upon their face the acknowledgment that they 
are promises to pay, and not the pay itself; and men 
are so constituted, and society is so delicately organ- 
ized, that times are liable to come when men shall 
have a general distrust of mere promises, and shall 
desire to see them changed into fulfillment. It is 
true that these notes cannot all come back at once 
for redemption, nor indeed any large proportion of 
them, since, unlike the money of the old State banks, 
they pass freely beyond the boundaries of States and 
sections, and become widely diffused. Still, general 
confidence is a thing so sensitive, and credit-money 
is in its nature such, that an absolute freedom from 
panics and consequent suspensions cannot rationally 
be predicted. 

In the second place, the legally required ratio of 
lawful money to liabilities is largely weakened, as 
the law now stands, by the provision that " bank bal- 
ances and clearing-house certificates shall be deemed 
to be lawful money." As far as immediate converti- 
bility of the notes is concerned, it is evident that 
this clause neutralizes largely the natural effect of 
the required ratio. Bank balances are not cash. If 
real, and not fictitiously created, they are a part of 
the assets of the bank, but their virtue is too remote, 
in most cases, to help any bank sustain a "run." 
What is wanted to convert notes and allay a panic 



ON CUERENCY IlSl THE UNITED STATES. 351 

is not assets, however good they may be, but lawful 
money. The New York banks pay interest on de- 
posits, as well from other banks as from individuals; 
and, consequently, the reserves of the nineteen hun- 
dred national banks located elsewhere than in New 
York are held in that city to the extent of about 
one-fifth of the capital stock of all those banks. 
These " balances " due from New York to the coun- 
try count as the principal part the "reserve" of the 
country banks, and two very ill consequences follow: 
first, the country banks are weakened as to the real 
purpose of a " reserve," which is to assure bill-holders 
but especially depositors of the safety of their inter- 
ests in the bank, and of the certainty of an imme- 
diate response to their call ; and second, masses of 
paper-money go to New York in the dull season for 
the sake of this interest, and to earn it can only be 
loaned to stock speculators, whose operations are 
injurious alike to the banks collectively and to the 
whole people. The increased transactions at the 
clearing-house at the time when the demands of 
legitimate business are least, show conclusively the 
uses to which this money is put. The transactions 
of the clearing-house for the year 1872 were more 
than $32,000,000,000, a larger amount than the clear- 
ings of the city of London. A depreciated paper- 
money is the glory of speculation, but the blight of 
honest business. 

In the third place, there is a wretched ambiguity 
in the term "lawful money" as used in the national 
bank act. Strictly construed, that term can only 
mean the legal gold dollars of the United States. 
But the Treasury Notes, called greenbacks, had been 



352 ELEMENTS OF POLITICAL ECONOMY. 

issued and made legal tender a few months before 
the passage of that act; and the words "lawful 
money " were designed to be loosely construed so as 
to 'mean greenbacks; and the Supreme Court has 
allowed this construction ; and the redemption of 
the national bank notes has heretofore been a mere 
mockery. It has been a redemption in irredeemable 
paper — a sham equivalent to no redemption at all. 
At the same time, because the term " lawful money " 
must of course include the gold coin, the banks of 
New York can loan out on interest to speculators 
their greenback reserves, and count the demoralized 
gold, received for security or collateral, as " lawful 
money " in their statement of " reserve," and thus 
be made to contribute — they have been made to 
contribute — to gigantic speculations in gold. It is 
not decent for the United States to palter thus vi^ith 
words in a double sense. If the government would 
redeem its greenbacks, the banks could redeem their 
bills ; they would require no larger reserve than they 
now hold ; and the twelve years' national disgrace 
of compelling people by law to receive a dishonored 
paper would pass away. Treasury redemption means 
bank resumption, and when that comes, if it ever 
does, the national banking system can be correctly 
judged and easily amended. 

In the fourth place, there is the facility with which 
Congress may expand the circulation. This danger, 
always impending, has already struck once. By the 
law of July, 1870, the original limit of $300,000,000 
is overpassed, and $54,000,000 additional author- 
ized. When the late war broke out, the paper 
money of the whole country, North and South, was 



ON CUKRENCY IN THE UNITED STATES. 353 

only $202,000,000 ; ^ the maximum ever reached 
previously was only $214,000,000 in 1856, and at the 
same time a maximum of $138,000,000 in coin;^ 
the currency per capita was, in 1860, $10.80 ; it 
would be difficult to give solid reasons why the 
country needs more money now than then, since 
credit-paper has come much more than formerly to 
serve the purposes of currency ; but the volume of 
the whole currency has much more than doubled 
since 1860, and the volume of paper-money much 
more than trebled ; the currency per capita is now 
not far from $20.48 ; ^ and the badness of the cur- 
rency in consequence of its excess, and almost in 
the measure of its excess, can be unhesitatingly in- 
ferred from this marked increase of the per capita 
rate. It is nearly certain that for strictly business 
purposes no more money is required now than in 
1860 ; almost all wholesale transactions are settled 
for in credit-paper, and this credit-paper is virtually 
set off against some other credit-paper, currency 
being only needed to adjust the balances ; farmers 
indeed, as a rule, sell their grain and wool for money, 
and wages will always be largely paid in money ; 
but general business is being done more and more 
by credit-paper of some sort, and to do a given 
volume of business requires much less currency than 
formerly it did. The national banks at present are 
circulating $345,000,000 of paper money. 

I will suggest as improvements in the practical 
working of the national banking system the fol- 
lowing : — 

. 1 Report of Mr. Secretary Chase. 

2 Hunt's Merchant's Magazine Year-BooTc, 1870. 

3 Comptroller's Report, 1872. 



354 ELEMENTS OF POLITICAL ECONOMY. 

1. The utter abolition of usury laws. It is true, 
that these laws of the States in which the banks are 
located are both evaded and disregarded by the 
banks, but it is also true that the influence of the 
laws is mischievous, and makes a paper-money, suf- 
ficiently inelastic in its own nature, still more ine- 
laytic. It is a great deal better to do openly and 
legally, what will otherwise be done indirectly and 
clandestinely. When money is more in demand, 
interest on it naturally rises ; if higher interest is 
legally demanded, those who can forego the use of 
the money will do so, leaving the more for those 
who want it the more ; and when money is very 
much wanted, banks ought to accommodate those 
who want it the most, and the only practical way to 
find out who want it the most is to find out who will 
pay the most for its use. Banks have a right to get 
all that they can for their services in an open market, 
and it is best for the public that they use this right, 
for then the services are sure to be rendered to those 
who most need them. A rising rate of interest in 
time of money pressure is somewhat like the brakes 
upon the railroad train. It manages the momentum. 
It graduates the supply to the demand. It tends to 
leave something to those most desperately in need. 
Free interest will not make our present currency 
elastic, but it will tend towards it ; no currency can 
be "so elastic as the world's currency of gold and 
silver, with or without smaller quantities of notes 
instantly convertible into that. 

2. So long as legal-tenders and national bank bills 
are equally irredeemable, and government stands 
equally behind them both, there does not ?eem to 



ON CURRENCY IN THE UNITED STATES. 355 

be any good reason why both may not be counted 
equally in the reserve. If they could be thus 
counted, the form of harmful speculation known as 
"locking up the greenbacks" would be shorn of its 
power. It would be much easier for the banks than 
it is now always to have on hand the legal reserve, 
depositors would probably feel as secure as before, 
and I cannot see how it would weaken the safety 
of the system. 

3. Experience has shown, both in this country 
and in Great Britain, that there are periods in every 
year during which large bank accommodations are 
sure to be demanded, and other periods when they 
are sure to be slack. June and July, in this country 
at least, are the slackest months ; the two months 
preceding^ June and the two following July are still 
slack; March and October are demand months; and 
from November to March the period of strongest 
demand. It is easy, accordingly, to maintain the 
legal reserve in the summer, more difficult in the 
winter. Professor Atwater suggests, as an amend- 
ment of the present law, the maintenance of an 
average reserve of 25 per cent, throughout the year, 
by levying a tax of 5 per cent, upon the excess of 
each bank's average aggregate circulation and de- 
posits over four times the average of lawful money 
actually held by it or deposited to its credit in the 
Treasury of the United States. My readers will 
properly infer from these last words that the Treas- 
ury volunteers to keep for any bank desiring it any 
portion of its reserve of legal-tenders, I think this 
plan of the average better than the plan of Mr. 
Schreiner, brought out in " The Financier " of 



356 ELEMEXTS OF POLITICAL ECONOMY. 

August 9, 1873, to vary the scale of reserves in 
different parts of tiie year from 30 per cent, in June 
and July to 15 per cent., or even less, in the winter. 

4. In the present provisional state of things, before 
resumption takes place, I hold that a strong legal 
reserve should be maintained ; and agree with Mr. 
Schreiner, that the banks should be prohibited, under 
severe penalties, from including and counting as part 
of their legal reserve any gold or gold certificates on 
which they have in any manner loaned or advanced 
legal-tenders. 

5. The grand improvement in the working of our 
bank system would be the Resumption of Specie 
Payments. 

The law of July, 1870, also authorized a new kind 
of banks called coin-banks, not limiting their number 
or the capital to be invested in them, virtually pledg- 
ing the government to redeem, if necessary, their 
notes in gold, and requiring them to keep 25 per 
cent. " of their outstanding circulation in gold coin 
of the United States." This circulation must be 
based on United States bonds at the rate of 80 for 
100. Four such banks had been organized at the 
opening of the year 1873, one in Boston and three 
in California, and their aggregate circulation of re- 
deemable notes was at that date $1,600,000. This 
legislation adds an entirely new kind of money to 
kinds quite too numerous before. Probably no other 
nation ever had so many sorts of money at one time 
as are legal now in the United States, Let us see 
how many kinds of money we have. 

1. Ooin money. But even here there is great con- 
fusion, and dissimilarity in value. The silver dollar, 



ON CURRENCY IN THE UNITED STATES. 357 

although no longer the standard of account, is still 
coined at the mint, is still legal tender for debts to 
all amounts, and is worth much more than the gold 
dollar, and more still than a nominal dollar's worth of 
smaller silver; while the baser coinage is of two va- 
rieties, copper-nickel, and copper-tin-zinc, of differing 
inherent and legal tender value. 

2. Coin certificates. Persons may deposit gold 
coin and bullion in suras not less than $20 with 
any treasurer of the United States, and receive 
therefor certificates, which are redeemable at sight 
and receivable for duties on imports. Government 
may also issue certificates in payment of interest on 
the public debt ; but the amount issued to depositors 
and as interest must not be more than 20 per cent, 
beyond the gold then in the treasury. 

3. Bills of coin banks. These are much like the 
old State bank-bills, except that they have the in- 
dorsement of the United States. The Comptroller 
of the Currency may issue to any association making 
a deposit of bonds, as security, notes of different de- 
nominations not less than five dollars, to an extent 
not exceeding 80 per cent, of the par value of 
the bonds deposited. These notes rest back for re- 
demption on one quarter of their own amount in 
coin. One dollar presented for payment in coin will 
practically withdraw four dollars from circulation, 
thus introducing an element of hazardous fluctua- 
tions. 

4. Legal tender notes. These were issued in 1862 
and 1863 to the amount of $450,000,000, of which 
$356,000,000 are still outstanding. They are the 
largest element in our present currency, they bear no 



358 ELEMENTS OF POLITICAL ECONOMY. 

interest, they are irredeemable, and have always been 
much depreciated as compared with coin. 

5. Fractional currency. $50,000,000 in denomina- 
tions less than a dollar are authorized by law, and 
about $40,000,000 are now in circulation. They are 
redeemable in legal tenders in sums not less than $3, 
and receivable in sums less than $5 for debts due 
the United States, except for duties on imports. 

6. National hank bills. About $345,000,000 of 
these are now in the hands of the people. As they 
are redeemable in legal tenders, their value is equal 
to those and equally depreciated as compared with 
coin. 

Thus the present currency of the country is made 
up of six different kinds of money, embraces three 
distinct dollars of differing value, each of which is 
legal tender for debts in all sums, and amounts in all 
to $800,000,000 more or less. It is too much in quan- 
tity, and most of it inferior in quality. The demand 
for more currency, which has not even yet spent its 
force in some parts of the country, is as senseless a 
demand as ever was raised. It proceeds from the 
old misapprehension of the nature of money. Money 
is only a tool, — a value tool, whose sole work is to 
help exchange other values, — and men confound the 
tool with the values, and think there is a lack of the 
former when what is really lacking is the latter. 
The old dogma of the Mercantile System, though 
confuted a thousand times, is perpetually stealing 
back into the minds of men. It is a striking in- 
stance of what would be called by the logicians a 
Fallacy of Simple Inspection. On the contrary, 
there are those, who, admitting that the present 



ON CDKRENCY IN THE UNITED STATES. 359 

volume of currency is excessive, nevertheless think 
that business will soon grow up to it, that prospec- 
tive transactions will healthfully absorb the whole of 
it, and that the simple force of national development, 
without contraction of its volume, will bring our de- 
preciated currency to par with gold. This position 
mistakes the method in which business is practically 
done. Increase of business does not necessarily 
imply increase of currency at all. The business of 
the whole world is largely done, increasingly done, 
by the use of a commercial expedient called set-off, 
by which one debt is made to pay another debt, and 
so the mass of debts liquidate themselves, and little 
currency is needed. It is the principle of the clear- 
ing-house. London has become the clearing-house 
of the whole world, the place where international 
debts are exchanged against each other, and some- 
thing like £5,000,000,000 of checks and bills pass 
that clearing yearly. British business has increased 
threefold at least in the last quarter of a century, 
but British currency has increased but little, even if 
it has increased at all. The bank-note circulation 
of the two islands is a little less than £45,000,000, 
and the gold and silver coin just about £80,000,000. 
Money, though vastly important as determining- the 
denominations of value, does after all but the driblets^ 
the great bulk of transactions being done by set-ofF. 
Even bank notes, when truly convertible, unless of 
small denominations, have usually a short interval 
between issue and redemption. The average life of 
a Bank of England note is reckoned to be less than 
three days, and is never reissued. 

Professor Bonaray Price of the University of Ox- 
ford, in his excellent book on the Currency, has 



360 ELEMENTS OF POLITICAL ECONOMY. 

admirable remarks on the limits of money both 
metallic and paper; and in a private letter to my 
friend General Garfield (who permits me to use it), 
gives the following neat illustration : " Goods are 
very little exchanged by currency, — I mean coin and 
notes. Setting off of debts against each other does the 
work. Just analyze an investment. Take this case. 
I make a profit of .£1000 by selling iron to America. 
I wish to invest it. I am paid by a bill which implies 
that some Englishman is a debtor to some American. 
I send the bill to my banker. He gets it paid, — not 
in currency, but by a setting off of debts at the clear- 
ing house. I buy a railway share, or a lot of Amer- 
ican cotton. I pay for it by a check on my banker, 
who now owes me XIOOO. He pays that check 
again, not in currency, but at the clearing house. 
The result is that I made £1000 by selling iron, and 
I have the proceeds in a railway share or cotton, and 
currency has not done one iota of the operation." 

In opposition to the complexities, uncertainties, 
and endless losses of our present currency, my friend, 
Mr. Amasa Walker, advocates what he calls a mer- 
cantile currency^ that is, a paper money issued by 
banks, and based dollar for dollar on specie actually 
in reserve. He would have but one kind of money, 
and that kind this. As he admits, such a money would 
be -local and conventional, but it would also be as in- 
variable in value as specie, and more convenient. But 
as this plan requires the minting and maintaining of 
as much or more specie than would be required if 
specie were the only money, as it would always be 
difficult to secure that all the banks should always 
have as much of coin in reserve as of paper circu- 



ON CUEEENGY IN THE UNITED STATES. 361 

lating, and as the element of credit enters into the 
nature of such paper money, I cannot think his 
scheme is preferable to my own. 

Let the money of the nations be gold and sil- 
ver coins; let these be minted on some universal 
scheme for commercial convenience ; let nothing 
be used as a measure of values but the denomi- 
nations of these coins ; then, in connection with 
such money as a basis, money which will hold its 
units, whether pound, dollar, or franc, as invariable 
as such measures can be kept, let there come in the 
various expedients of paper credit, such as certifi* 
cates of deposit, bills of exchange, checks, drafts, or 
what name soever they may bear, and most, if not 
all, the conveniences of paper money will be secured, 
and none of its fluctuations and disasters experi- 
enced. These forms of paper would not be money, 
although they might be made to perform much more 
than they do now one of the functions of money, 
that is to say, they would serve in large and distant 
transactions as a medium of exchange, but they 
never could disturb, as paper money usually does, 
the measure of value. Under this system banks 
would still be necessary for the purpose of loaning 
money, buying and selling credits, making collections, 
and so on, but they would not manufacture and issue 
money. Thus the two legitimate spheres of money 
and of credit will be kept entirely distinct. 



862 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER XII. 

ON CREDIT. 

Political Economy is the science of exchanges. 
Because it is the science of exchanges, its definitions 
and principles must be broad enough to cover and 
explain all cases of exchange actually occurring or 
possible to occur. The nature of the things ex- 
changed is a matter of indifference; the science has 
alone to do with the motives and facts of the ex- 
changes themselves. Some exchanges are perfectly 
consummated at once, the things exchanged and the 
ownership in them are mutually passed over then 
and there, and there is an end. But there are other 
exchanges which have this peculiarity, that the trans- 
action is not then and there ultimately closed, but 
one (or both) of the persons exchanging relies on 
the good faith of somebody to fulfill in the future a 
promise expressly or impliedly made in the exchange. 
This peculiarity is very important to be considered, 
and gives rise to all those phenomena which pass 
under the general name of Credit. Credit and Debt 
are correlative terms. There is no credit without 
debt, and there is no debt without credit. Strictly 
defined, a Credit is a Right to demand something 
from somebody ; strictly defined, a Debt is an Obliga- 
tion to pay something to somebody ; there would be 
some advantage in, and there is some tendency in 



ON CEEDIT. 363 

commercial language towards, the use of these terms 
in this technical sense ; but, as the rights alone 
become the subject of exchange, the terms merely 
relative to persons become of less consequence, and 
what lies between debtors and creditors may be 
called indifferently credits or debts; for, while it is 
of vital consequence to persons^ whether they owe or 
are owed by others, exchange cares not which is 
debtor, provided both be " good," but looks alone at 
the rights, which are property. While, therefore, the 
relation of creditor and debtor is wholly a personal 
relation, is in substance a claim of one person on 
another person, and is based on good faith only, the 
claim itself is just as much property as anything else 
is property. It may be, and is constantly, bought 
and sold. It always involves the element of future 
time, and is founded on the belief of one of the 
parties in a virtual promise made by the other; 
hence the term credit from Credo, I believe^ and the 
corresponding term debt from Debeo, I owe. The 
ris;ht to demand from the debtor at sOme future time 
an equivalent for what the creditor renders now, is 
the service which the creditor receives from the 
debtor at the time of the exchange. It is a clear 
case of value. Each renders to the other satisfactory 
equivalents. The right to demand a future equiva- 
lent is the present equivalent for the sake of which 
something else is rendered. All our definitions apply 
here perfectly. Considered as a mere case of value, 
the transaction may be said to be ended ; but, con- 
sidered as to the nature of the exchange which re- 
quires another exchange to complete it, the transac- 
tion is not yet ended, and Political Economy must 



864 ELEMENTS OF POLITICAL ECONOMY. 

follow it in its principles to the end. We define 
Credits or Debts, then, as Riglits not yet realized. 

The amount of transactions in credits is im- 
mense in every commercial country, and is becom- 
ing constantly greater. Not only are the exchanges 
very common in which the right to demand future 
payment is one of the services rendered, but the ex- 
clusive traffic in debts — exchanges of one form of 
debt for another — has already reached gigantic pro- 
portions in all parts of the world. In order that this 
form of exchanges may take place, it is of course 
needful that there should be a general confidence in 
the public mind ; in other words, a general expecta- 
tion that such debts will be promptly paid. As indi- 
cating a common honor and financial ability among 
business men, and as facilitating the production of 
services of all sorts, this state of general confidence 
is so desirable in the sphere of exchange, that great 
pains should be taken that nothing occur to destroy 
it. Credit-exchanges are naturally more sensitive 
than any other, since they walk by faith and not by 
sight. For reasons to be adduced shortly, they are 
more liable to be unduly multiplied than other ex- 
changes are. The credit system is a great blessing 
to mankind, but, like all other great blessings, is very 
likely to be abused. 

^Ir. Macleod, who seems to me to have cast orig- 
inal and important light on the subject of Credit, 
although endeavoring too much to apply to it strict 
mathematical forms, makes two preliminary distinc- 
tions. Of these, the first is, the distinction between 
those paper documents which convey titles to specific 
things, such as bills of lading and dock warrants, 



ON CEEDIT. 865 

and those paper documents which convey credit 
rights, such as bank notes and bills of exchange. 
Both are transferable at will, but the former go with 
the goods, are a title to the goods, and have no value 
separate from the goods; while the latter have noth- 
ing to do with any specific piece of property, but are 
a general claim upon a person. For example, a man 
takes a package of greenbacks to his banker, and 
asks him to take care of it, and return it to him or 
any one else he may name, on demand, no property 
in the money passes over to the banker, the relation 
of debtor and creditor does not arise, the banker be- 
comes the Trustee or Bailee of the money, but not 
its owner ; but when, in the ordinary case, a cus- 
tomer deposits money with his banker, the property 
in the money passes over absolutely to the banker, 
the relation of debtor and creditor arises, the de- 
positor receives a claim, that is, a right to demand^ 
in lieu of his money, and the transaction becomes a 
true exchange. The banker buys the money of the 
customer, and sells him the right to demand back 
an equal sum at any time. Thus we reach, through 
this distinction, the exact nature of Credit. 

The second distinction turns on a similar point, 
and clears up the ambiguity in the English words 
loan and borroiv. I use the same word, when I say, 
" I loaned him the book," and when I say, " I loaned 
him ten dollars," but the two transactions are quite 
distinct in their nature. In regard to the book, I do 
not alienate to him my property in the book at all, 
I expect him to return to me that particular book, 
and I may even take it back without his permission; 
but in regard to the money, I do alienate my prop- 



866 ELEMENTS OF POLITICAL ECONOMY. 

erty in it completely, I have no claim on that specific 
money but only on an equivalent amount, and I am 
a thief if I take that amount out of his purse be- 
cause I happen to find it. I have a claim on him 
for ten dollars, but he must pay me voluntarily or be 
compelled by legal process. Thus the loaning and 
borrowing of chattels come under one set of legal 
incidents, and commercial loaning and borrowing 
come under another. The Latin language, rich in 
legal distinctions, has a word for each of these trans- 
actions ; the loan of a chattel is a commodatum, and 
conveys no property ; the loan of money, or other 
measurable thing like that, is a mutuuni, and be- 
comes the full property of the receiver. 

The sale of a service to be rendered in future, 
which is the core of credit, is well illustrated by the 
old usage of English booksellers to advance money 
to authors on a book not yet written. Copyright is 
a right of the author to demand pay for books not 
yet sold after they shall have been sold. The copy- 
right itself may be bought and sold. In an inven- 
tory of all values, accordingly, it is very clear that 
there must be included (1.) the property in the pro- 
duction of the past, or commodities; (2.) the prop- 
erty in the production of the present, or personal 
services ; and (3.) the property in the production of 
the future, or credits. The first and last are com- 
pletely transferable, and the second partially so ; all 
are well guarded by law ; and the last, though itself 
intangible, is commonly, but not necessarily, recorded 
on paper. The paper is the evidence of the right, 
and not the right itself. These paper documents 
are termed Instruments of Credit, and are of two 



ON CREDIT. 367 

kinds : first, Promises to pay, and second, Orders to 
pay. We will first look at these principal forms of 
Credit, and then at its advantages and disadvantages. 
(1.) Book Accounts. A charge in a trader's 
books is both a current and a legal evidence that 
the person charged has received a certain service, 
and has virtually promised to render the sura charged 
as a return service. This is the most common of 
the forms of credit; and if the person charged fails 
of his own accord to complete the exchange thus 
commenced, the law, in the absence of any proof to 
make the charge suspicious, collects it, if possible, 
and forcibly completes the exchange. The conven- 
ience of this form of credit is so great that it is not 
likely ever to be disused ; and as between people 
who deal much with each other is very useful, inas- 
much as their respective book accounts are set 
against each other in settlement, and only balances 
are required to be cancelled in money. It is for the 
benefit of both creditor and debtor, however, that 
such credits should be short in time, and such settle- 
ments frequent, since thus only does the creditor 
realize the gains of the exchange, and the debtor 
keep fair his mercantile name. If it be difficult or 
impossible to follow strictly the excellent financial 
maxim, " Pay as you go," the next best thing to 
that is, " Go and pay." The gains of an exchange 
are lessened, or its terms become more onerous, just 
in proportion as delay in its completion is experi- 
enced or expected. Book accounts are subject also 
to this disadvantage as compared with other forms 
of credit, that their number and amount as against 
any person are less likely to become publicly known, 



868 ELEMENTS OF POLITICAL ECONOMY. 

and therefore he is more likely to be trusted in this 
form by others beyond the point of his solvency 
and their safety. 

(2.) Promissory notes. These are issued by indi- 
viduals, corporations, and nations. They are usually 
on interest ; and in this case, if the principal be con- 
Bidered secure, and the interest be promptly paid, 
the element of time is comparatively a matter of 
indifference, because the interest is compensation for 
delay, and is frequently the motive on the part of 
the holder of the note for rendering that service of 
which the note is evidence. When such promis- 
sory note, or other form of credit, is payable to 
bearer, it may run a devious round, may play a part 
in many a transaction ; but it is in reality nothing 
but a general warrant entitling the holder, in view of 
some original service of the claim for the return of 
which he has become in some manner possessed, 
to take his satisfaction for that service whenever he 
will. It is like the land warrants, given by the 
United States, entitling the holder, in return for mili- 
tary service rendered, to locate his acres on any unoc- 
cupied national land within the national boundaries. 
As a warrant, its function ceases so soon as the acres 
have been chosen. Credit passes into payment. 
The private notes of individuals and corporations 
are payable in money, and if in credit-money, this 
itself ends in something that is not credit, and thus 
the circuit of exchange is completed. 

When the United States borrows money, it gives 
the lender a promissory note on interest at a certain 
rate, interest and usually principal being payable at 
certain specified times. These notes are called indif- 



ON CKEDIT. iiij9 

ferently bonds, stocks, or funds. The government is- 
sued in 1862-1865, both inclusive, about $2,500,000,- 
000 worth of them, in return for money loaned to it 
by the people, and they bore interest at rates varying 
from 5 to 7-iQ per cent., and were payable at periods 
varying from three to forty years. The bonds des- 
ignated as " five-twenties," bear gold interest at six 
per cent., and the government reserves the right to 
pay the principal in five years, and pledges itself to 
pay it twenty years from date. So of the "ten- 
forties." The " seven-thirties" were so named, not 
from the time of payment, but from the rate of inter- 
est, which was yj^^o^ per cent., payable in legal tenders 
for three years, when the principal was payable in the 
same, or fundable in six per cent, gold-bearing 
bonds, at the option of the holders. So ready have 
the American people been to loan money to their 
government for the past few years, and take these 
bonds as security, that the treasury has experienced 
very little embarrassment from the want of money, 
although the expenditures have been at times over 
$3,000,000 a day. In the course of one week in the 
spring of 1865, ninety and odd millions of dollars 
were subscribed to a national loan. It is believed 
that the history of national borrowing presents no 
parallel with the late success of the United States 
in realizing money in the way of loans. The largest 
English loans ever made were made in 1812 and 
1813, during the wars with Napoleon and the United 
States. In these two years the British exchequer 
borrowed $534,000,000, being an average of $22,- 
250,000 a month, and pronounced that a wonderful 
financial achievement, as it was ; but, from an ag- 

24 



370 ELEMENTS OF POLITICAL ECONOMY/ 

gregate of national wealth not larger than Eng- 
land's then was, though from a larger population, 
the United States realized in four years from loans 
three times as much at least in gold value, and at 
an average rate of interest but little higher than 
England then paid, which was five per cent, and 
a fraction.^ The treasury notes commonly called 
greenbacks are promissory notes not on interest. 
They were made a legal tender for all debts public 
and private except duties on imports and interest on 
the public debt. 

(3.) Bank-bills. Bank-bills are a form of prom- 
issory notes not on interest, and thus differ from the 
notes of ordinary corporations ; but the bank offers, 
as a sort of compensation for the privilege of circulat- 
ing notes not on interest, to convert them into coin 
on demand of any holder. It is this proffered con- 
vertibility into coin that enables the promissory notes 
of a bank to circulate as money, while the notes of 
other corporations and individuals equally solid and 
solvent do not circulate as money. It must be borne 
in mind, however, that the offer to convert them into 
cash does not essentially alter the nature of bank- 
notes ; they are a form of credit ; and although they 
are commonly issued against another form of credit, 
namely, against the interest-bearing notes of individ- 
uals who resort to the bank for discount, this only 
complicates the exchange without changing its na- 
ture. It is an instance of exchanging one form of 
credit for another which happens to have a greater 
currency or validity than the first, and for this supe- 
riority of the bank credit the individual credit pays 
' Appleton's Annual Cyclop£edia, 1803. Article, "Finances." 



ON CEEDIT. 371 

an interest, in other words, is discounted ; and such 
exchanges of one form of paper credit for another, 
with or without a premium, may go on indefinitely ; 
as credit money, such paper may serve as a medium 
in many exchanges ; but ultimately, and before the 
entire series of transactions is closed, such paper is 
to be redeemed in coin, or taken in by the banker in 
payment of some debt due to him, in both which 
cases it is extinguished as an instrument of credit. 
Credit-paper of all kinds is very open to settlement 
by set-off. 

(4.) Bank Deposits. A bank is an institution for 
the creation, management, and extinction of credits. 
A banker is a dealer in credits. As a merchant is 
a buyer and seller of commodities, so a banker is a 
buyer and seller of credits, buying some credits with 
other credits, and some credits with money, and 
money also with credits. The word bank meant 
originally a mass, an accumulation; as we still say, 
a sand-bank, and the banks of a river. When first 
applied to commercial transactions, as it was in 
Venice as early as 1171, it meant a common con- 
tribution of money then made by the citizens to the 
state ; and also the place where commissioners paid 
the interest on this loan, and the shares in it were 
transferred. Both of these meanings inhere in the 
modern word bank. A bank is a place to which 
the money of other people is brought, as well as the 
banker's own ; and hence we speak of banks of de- 
posit : it is a place in which one form of credit is 
exchanged for another form ; and hence we speak of 
banks of discount : it is frequently a place where 
promissory notes, designed to circulate as money, are 



372 ELEMENTS OF POLITICAL ECONOMY. 

issued ; and hence we speak of banks of circulation. 
These three are the main functions of banks ; and 
of these, the two former are, while the third is not, 
essential to banking. The central idea in banking 
is for the banker to receive his customer's money 
and credits becoming due, and to render in return 
for these a credit, that is, a right to demand from 
him an equal sum at a future time. The evidence 
of this right is entered on the banker's books, and 
thus becomes a Deposit. The ownership of the 
money and of the credits deposited passes over com- 
pletely from the customer to the banker. The latter 
has the right to do just what he pleases with them ; 
only his entry of the transaction in his books is a 
virtual promise to pay that amount on demand to 
the customer, and he must be ready to respond to 
his customer's call, whenever the latter demands, not 
his own money, but so much of his banker's money. 
A deposit, therefore, is not the thing deposited, but 
a credit. It is the depositor's property and the 
banker's promise. It is in this way that a banker 
buys money with credit. The motive that leads the 
customer to intrust his money to the banker is the 
desire, not to have that specific money kept safely, 
but to have the right to call on the banker for such 
sums (not to exceed the deposit in the aggregate) 
and at, such times as may suit his own convenience. 
He has such confidence in the integrity and sol- 
vency of the banker, and finds it so practically 
convenient to have dealings with him, that he pre- 
fers a credit on him for the amount to the posses- 
sion of the money itself. The motive of the banker 
to receive his customers' funds on these terms is the 



ON CUEDIT. 373 

fact that he can safely use a large portion of these 
funds in other operations in credit })rofitable to him- 
self, and at the same time be sure of being able to 
meet his customers' calls for money He finds by 
experience that many of his customers wish always 
to have a balance in his hands; that while some of 
them are constantly drawing on him for cash, others 
of them are as constantly depositing with him in 
cash, and that consequently he can use with safety a 
part of the money he has purchased with his credit 
to purchase other credits with. The gain for the 
whole community is, that a nev) capUal has been 
thereby created, a new purchasirjg-power, something 
in the world of value additional to what existed be- 
fore. This addition is not indeed unlimited, but it 
is actual ; not unlimited, because all credit is the 
right to demand something in future, and the value 
of the credit is the prospective value of that some- 
thing, and if that something fails to come, the value 
of course is gone ; but actual, because the right to 
a future product, authenticated in credit, has a pres- 
ent value. The true limits of credit can be learned 
only by experience; dangers in credit arise from the 
uncertainties of the future ; but the property in credit 
and the propriety of credit and the potency of credit 
are certain. Value has its sphere of operations in 
the Past through commodities already completed, in 
the Present throjugh personal services ready to be 
rendered, and in the Future through credits awaiting 
further production. 

(5.) Bank Discounts. The paper that is dis- 
counted by bankers may be either the promissory 
notes already characterized, or the bills of exchange 



374 ELEMENTS OF POLITICAL ECONOMY. 

soon to be characterized, but the function of dia- 
count is so peculiar that the paper subjected to it 
must be separately enumerated in a classification 
of the instruments of credit. The discounting of 
paper is the second essential function of banking; 
and it is more in accordance with genuine banking 
to pass the price of the paper to the seller's credit 
in the form of a deposit, that is, to buy one credit 
by creating another, than to pay the money over at 
once. Those who do the latter are called in Eng- 
land bill-discounters rather than bankers, but most 
of our bankers do both, though there is a strong 
tendency towards the separation of the two in this 
country also. Manufacturers and wholesale mer- 
chants usually sell goods on time, as it is called, 
say three months. A debt is thus created. The 
manufacturer or wholesaler is creditor and thejobber 
or retailer is debtor. But a debt is property ; and 
the creditor in this case wishes to avail himself of 
his property at once for further production ; so he 
either takes a note from his debtor, or draws a bill 
upon him, and this piece of property is ready for 
sale. The banker buys it, that is to say, the cred- 
itor passes over to him the right to demand payment 
of the debtor at the end of three months, and receives 
from the banker either money or so much of the 
banker's credit, that is, a deposit in the creditor's 
favor on the banker's books. For furnishing this 
creditor either with ready money or a more availa- 
ble credit in lieu of his mercantile paper, the banker 
charges a percentage. This is discount. Discount 
is the difference between the face and the price of 
the paper. This is the chief source of profit in 



ON CREDIT. 375 

ordinary banking. When the paper matures, the 
banker realizes I'ronn the debtor its full face. The 
following is the form of a bankable note: — 



!$1000. Noirrn Adams, Mass., Nov. 10, 1871. 

Three months after date I promise to pay to the order 
of Joshua Swan, one thousand dollars, payable at the Adams 
National Bank, value received. 

Due Feb. ^°/i3. Leander Allkn. 



Joshua Swan's name on the back of this paper, 
and the requisite government stamp, make it, if the 
parties are " good," a legal and acceptable note for 
discount. Two names are usually, not always, re- 
quisite; but paper is discounted on the strength of 
all the names that are upon it. 

It is thus in part through the purchase of dis- 
countable notes for money that banks derive their 
character as money-lenders. Also, such reserve 
sums as they do not wish to invest in negotiable 
paper, on account of the time involved before such 
paper matures, banks frequently loan on call to 
those who have salable collateral securities to 
pledge. So far forth they become direct money- 
lenders. The following is the form of such 
pledge : — 



376 ELEMENTS OF POLITICAL ECONOMY. 



$5000. Troy, N. Y., Nov. 10, 1871, 

On demand we promise to pay to the Bank of Troy, or 
order, five thousand dollars, for value received, with interest at 
the rate of six per cent, per annum, having deposited with said 
bank, as collateral security, with authority to sell the same, at 
the Brokers' Board, or at public or private sale, or otherwise 
at said bank's option, on the non-performance of this promise, 
and without notice, — 

10 shares N. Y. Central, 

55 do. Mich. Southern. John Smith & Co. 



The form of the paper to be discounted makes but 
little difference to the banker; a note is as good as 
a bill and a bill is as good as a note ; his chief con- 
cern is with the genuineness and financial solidity 
of the names ; but he is not always in condition to 
discount all the paper that is offered, in which case 
he accommodates regular customers and depositors 
first. 

We now come to three other forms of credit, which 
are virtually orders to pay. 

(6.) Bills of exchange. A bill of exchange is a 
written instrument designed to secure the payment 
of a distant debt without the transmission of money, 
being in effect a setting off or exchange of one debt 
against another. Thus, suppose A in Boston owes 
B in New York $1000, and another party, C in 
New" York, owes A in Boston a like sum ; it is not 
necessary that A should send the money to B to 
cancel his debt, and C send the money to A for a 
like purpose; the two debts, by means of a bill of ex- 
change, are set off against each other, and both trans- 
actions are closed without sending any money from 
one city to the other. A draws a bill upon C, direct- 



ON CREDIT. 377 

ing him to pay B $1000, and sends this bill to B, 
who, if the bill be drawn on sight, presents it to C 
for payment; if on time, presents it to C for accept- 
ance, who then pays it at maturity. An acceptance 
is written upon the face of a bill, as an endorsement 
is upon its back. A is called the drawer of the bill, 
C the drawee until he has accepted, and then the 
acceptor, and B is the payee. It is not often that 
the same person, as A, happens to owe another per- 
son in a distant place, as B, exactly the same sum 
as is owed him in that place by a third person as C; 
but by two bills of exchange, one drawn by each 
creditor on his own debtor, and then set off against 
the other, substantially the same advantage is reached 
as if it always happened so. Nearly all these bills 
come into banks in the way of ordinary business, 
either for discount or collection, and are adjusted 
through bank balances. The following is the form 
of an inland bill of exchange : — 



$3000. PiTTSFiELD, Mass., Oct. 1, 1871. 

Four montlis after date pay to tlie order of John Kent 
tliree thousand dollars, value received, and charge the same to 
account of Dan Stokks & Co. 

To Eli Teipp, Boston, Mass. 



Kent endorses, Tripp accepts, the stamp is affixed, 
and the bill is negotiable. Sometimes bills are 
drawn to the order of " ourselves," in which case the 
drawers also endorse. Not infrequently a bill passes 
through several hands, which may either be by succes- 



378 ELEMENTS OF POLITICAL ECONOMY. 

sive endorsements, specifying to whom payment is to 
be made, or by what is called an endorsement in blank, 
by which is meant that the payee or subsequent hold- 
er, to whom the bill has been endorsed, merely writes 
his own name upon the bill, which is equivalent to 
making it payable to bearer. The remarkable conven- 
ience of bills of exchange in adjusting debts between 
distant places has already brought them into very 
general use wherever the necessary basis for them 
in commercial integrity is supposed to exist ; and 
every year is witnessing an extension of their use 
in all commercial countries. Bills of exchange are 
either payable at sight, or after an interval fixed in 
the bill itself; and are either inland or foreign bills. 
Bills which have some time to run before maturity 
are frequently discounted by bankers or other money- 
lenders, that is to say, the payee transfers the bill to 
them, receiving the amount, minus interest for the 
time it has still to run ; and the bill thus serves the 
important function of enabling a debt due from one 
person to be made available for obtaining credit 
from another. It is a principal part of the business 
of banks to buy in this manner bills of exchange, 
either real bills, or accommodation bills, so called, 
which only differ from the others in that there is no 
real debt between the drawer and drawee, and col- 
lect tl^em at maturity, thus securing bank interest 
on all money paid in purchasing such bills. The 
bills are discounted on the joint credit of the drawer 
and acceptor. It is evident that the use of bills of 
exchange, especially those which pass from hand to 
hand by endorsement, dispenses with the use and 
transmission of large amounts of money, and, as 



ON CKEDIT. 87& 

between distant places especially, is one of those 
economizing expedients of credit which are the 
birth of modern civilization and a sound mercantile 
honor. 

Very similar are foreign bills of exchange in their 
functions and usefulness. Commercial relations be- 
tween two countries, say for example, France and 
England, always give rise to a mutual indebtedness 
of their merchants, and if these debts were all to be 
paid by the actual sending of money to and from, 
there would have to be a constant and expensive 
outward and inward flow of the precious metals in 
respect to each country, which necessity is neatly 
obviated by the use of bills of exchange, and coin 
is only transmitted to settle the balances on which- 
ever side there is an excess of debt. French dealers 
are always sending goods to England, and English 
dealers goods to France ; and for what they send to 
England the French merchants draw bills on the 
parties to whom the goods are consigned, and the 
English merchants draw similar bills on their debt- 
ors in France ; these bills are bought up by bankers 
or brokers in either country, and exposed again for 
sale to any parties who may have debts to pay in 
the other country. Thus bills on London, in other 
words, on English debtors, are always for sale in 
France ; and bills on France, that is, on French 
debtors, are always for sale in London ; the mutual 
debtors of the two countries, therefore, instead of 
sending coin to cancel their debts, buy and trans- 
mit these bills. As I wish to make the course and 
par of international exchange very plain to my read- 
ers, I will give a particular illustration. Suppose 



S80 ELEMENTS OF POLITICAL ECONOMY. 

Pierre & Co., of Paris, send a cargo of wine to Bar- 
clay & Co., of London, worth .£5000; the London 
firm thereby becomes indebted to the Paris firm to 
that amount, and Pierre & Co. draw a bill on Bar- 
clay & Co. for X5000; if they themselves have no 
debt to pay in London, they sell this bill to a Paris 
broker (if the exchange be then at par) for its face, 
minus interest for the time it has to run ; and this 
broker is now ready to sell the bill again to anybody 
in Paris who has a debt to pay in London ; and the 
person in London who receives it in liquidation of a 
French debt to him, presents it at maturity to Bar- 
clay & Co. for payment. A bill drawn in London 
for a cargo of hardware sent to Paris, is similarly 
negotiated with a London broker, and finds its way 
similarly to France, in payment of some English 
debt, and ends its career when it reaches the French 
firm on which it was originally drawn. "We are 
now in position to understand clearly what is meant 
by the pai' of exchange. The merchants in Paris, 
who have debts due to them in London, draw bills 
of exchange for the amount of these debts, and, 
through the agency of middlemen or brokers, go 
into the market to sell these bills to other Paris mer- 
chants who have debts to pay in London. If the 
former set have a larger amount to sell than the 
latter- have occasion to buy, in other words, if there 
be a larger amount of debts due from London to 
Paris, than from Paris to London, then the compe- 
tition of the sellers of bills on London will lower 
their price somewhat in the market, in order, as 
usual, that the supply and demand may be equal- 
ized. In this case the par of exchange is disturbed. 



ON CREDIT. 381 

a bill on London for .£100 may not sell for over 
£99, and the exchange is then said to be one per 
cent, against London, or, which is the same thing, 
one per cent, in favor of Paris. The par of ex- 
change, therefore, between two countries, depends 
upon the substantial equality of their mutual debts; 
and if an exchange unfavorable to either continues 
long, and especially if the discount on its bills be 
sufficient to cover the charges of the transmission of 
specie, gold will begin to flow from the country 
against which the exchange has turned, and the 
equilibrium of payments, and hence the par of ex- 
change will be restored. Also, the par tends to 
restore itself, without the sending of specie, in this 
way : if bills on London are at a discount in Paris, 
for the same reason that they are so will bills on 
Paris be at a premium in London, and therefore 
there will be a direct encouragement to the extent 
of the premium for exportations from England to 
France, because on every cargo sent bills can be 
drawn and sold in London for a premium ; but the 
more bills on Paris thus offered, the more the pre- 
mium disappears, and the par of exchange is restored 
so soon as the debts thus contracted by France are 
equal to the debts due her from England. At the 
same time, and so long as the discount on London 
bills continues, there is a discouragement to further 
exportations from France to England, because the 
bills drawn in virtue of such cargoes can only be 
sold below par. Here is another instance of a mag- 
nificently comprehensive law by which Nature vindi- 
cates her right to reign in the domain of exchange. 
It is through this law, stimulating exportations on 



382 ELEMENTS OP POLITICAL ECONOMY. 

the one side, and slackening them on the other, that 
most of the casual disturbances of the par of ex- 
change are rectified; but if, notwithstanding this, 
the disturbance continues obstinate, it indicates one 
of two things as true of the country against which 
the exchange has turned : it has either made over- 
purchases of the other country beyond the power of 
its ordinary exports to cancel, or 'the money in which 
the bills drawn on it are liable to be paid is an 
inferior money. In the first case, the only proper 
remedy is an export of gold to pay off the old scores, 
and a more prudent method of purchasing in the 
future; in the second case, which is well exemplified 
in the instance of Amsterdam, cited in a preceding 
chapter, the remedy is to raise the currency to a 
good specie standard. When the rates of exchange 
were first established between England and the 
Colonies, the Mexican dollar of commerce was equal 
in value to 4s. 6d. English, <£lr=4.44 dollars, and the 
par of exchange was established at that rate. U. S- 
dollars have always been less valuable than that 
Mexican dollar, and while the old par has remained 
the standard, the real par has been changed by each 
change in our coijis. Our present dollar contains 
23.22 grains of pure gold ; the English pound con- 
tains 113.001 grains, consequently the true par of 
exchange is $4.8665 to the <£, and by recent law of 
Congress is expressed by 100. The par of exchange 
between France and the United States is 5 francs 
17 centimes for |1 ; and between France and Eng- 
land, is 25 francs 20 centimes for XI. 

(7.) Checks. Formerly, in England, and in other 
countries as well, every considerable dealer kept hia 



ON CREDIT. 883 

strong box, and when he had occasion to make pay- 
ments, told down the solid cash upon his own 
counter. Afterwards, the goldsmiths of London 
solicited the honor of keeping in their vaults the 
spare cash of the merchants, who in their payments 
among one another came to employ checks drawn 
on the goldsmiths, and at the shops of the latter 
the principal payments in coin were effected. The 
later introduction of banks brought along with it 
the custom, now continually widening in commercial 
countries among all classes of people, of keeping 
one's funds with a banker, and making payments 
by orders, or checks, upon him. When the person 
making the payment and the person receiving it 
keep their money with the same banker, there is no 
need of any money passing at all in the premises, 
the sum being merely transferred in the banker's 
books from the credit of the payer to that of the 
receiver. The banker is quite willing to do this 
business for nothing, and even to allow the depos- 
itors a low rate of interest on all balances remaining 
in his hands, in consideration of the privilege he en- 
joys of loaning such proportion of the sums as he 
deems safe to other parties at a higher rate of inter- 
est. In the large cities, by an arrangement called 
" the clearing-house," substantially the same ben- 
efits are secured as if all the people of the city 
kept their cash at the same bank ; inasmuch as all 
the checks drawn on each of the different banks, 
and passing in the course of the business day into 
other banks, are assorted before evening at the clear- 
ing-house, and set off as far as possible against each 
other, leaving only balances to be adjusted in money. 



884 ELEMENTS OF POLITICAL ECONOMY. 

The London clearing-house was established in 1775; 
lately, the clearing-house itself, and the bankers and 
firms dealing with it, all have accounts at the Bank 
of England, and balances formerly settled by money 
are now settled by simple bank transfers. In the 
year 1872, X5,359,272,000 passed that clearing in 
that way, and there are besides many other clearing- 
houses in Great Britain. Checks may pass from 
hand to hand by endorsement; but in business 
towns it is more usual for each man to draw his 
own check to make payments, and pass in the 
checks he receives to his banker. Checks are bills 
of exchange with some differing legal incidents. So 
are drafts. A bill of exchange drawn by one banker 
on another has usually in this country been termed 
a draft. 

(8.) Circular Letters of Credit. These are issued 
by bankers to their foreign correspondents, ordering 
them to pay to the person named in the letter such 
sums of money as may suit his convenience, not to 
exceed in the aggregate the limit mentioned in the 
letter itself. To travellers in foreign countries such 
a letter of credit is much more convenient than to 
carry the money ; because, in the first place, they 
can obtain money on it in all the principal cities of 
the world in just such sums as they need; in the 
second place, they have to pay for no more credit 
than they actually use; in the third place, the letter 
is available for no one else, and so is not liable to be 
stolen, though it may be lost; and in the fourth 
place, the money need not be deposited with the 
banker at home any faster than it is actually called 
for abroad. 



ON CREDIT. 385 

These eight are the principal forms of instruments 
of credit; and we must now observe that credits 
are extinguished in four different ways: first, by a 
payment in money, which puts a commodity in 
place of the credit, and annihilates the latter; sec- 
ond, by a- release of the debtor from the obligation 
to pa}?^ by the free act of the creditor, which of 
course extinguishes his right to demand ; third, by 
renewal, either to the creditor, or to some other 
person with his consent, as becomes the case with 
persons receiving checks or bills of exchange ; and 
fourth, but principally, by set-off, as in book-ac- 
counts and at the clearing-house, since a mutual 
release from debts becomes a mutual payment of 
debts.^ Thus we see that most credits extinguish 
each other, and balances only remain. Credits are 
like a circle, which returns perpetually into itself. 
Some of the advantages of credit have been already 
anticipated in the discussion of its principal forms ; 
but we will now instance more specifically a few of 
these advantages. 

1. There are some men, and particularly young 
men, who have integrity and industry and skill, but 
no capital ; and when such men are enabled to borrow 
money to start themselves in business, or to enlarge 
a business already in successful operation, the gen- 
eral interests of production, as well as their personal 
interests, are subserved by such credit, because in all 
probability capital thus passes from hands which are 
less to hands which are more able to use it produc- 
tively. Those who are best able to make capital tell 
are generally those who are most desirous to obtain 
it, and frequently those who can offer the best secu- 

1 See Macleod's Economics, pp. 517, 518. 
25 



386 ELEMENTS OF POLITICAL ECONOMY. 

rity for its replacement. Nothing is to be said against, 
but everything in favor, of such a loaning of capital 
as shall bring it, under safe conditions, from the hands 
of the idle, the aged, those indisposed, or those in- 
competent to use it productively, into hands at once 
competent and honest. Such credit is a benefit, and 
only a benefit, to all the parties concerned, and to 
society at large. The operators retain something of 
profit after replacing the capital with interest; the 
lenders receive more than if their capital remained 
idle, or they employed it themselves ; and society is 
benefited by a more complete development and rapid 
circulation of services. Despite all the instances of 
broken faith, it is still an honor to human nature that 
men do so gain by good character the confidence of 
their fellows that they are, and ought to be, trusted 
with capital on their simple word or note; and it is 
the glory of free political institutions, that under their 
influence, more than elsewhere, young men with no 
other dower than integrity and purpose do rise, by 
the help of so slight a stepping-stone as this, in 
crowds, to the high places of opulence. In the point 
of view, that thus all the available capital of the com- 
munity is brought out into productive activity, too 
much can scarcely be said in favor of joint-stock 
companies, whose managers are known to be men 
of probity, which gather up the driblets of unoccu- 
pied capital here and there, and, combining them, 
enter upon paths of profitable production, which 
individual enterprise cannot tread. Too much can- 
not be said in favor of savings-banks, whicii take the 
surplus earnings of the poor, and not only keep them 
safel)', but pay a fair interest on each deposit, and 



ON CREDIT. 387 

loan the aggregate at a higher rate on choice secu- 
rities, thus stimulating frugality in a wide circle of 
df-positors, and at the same time aiding production 
by opportune loans to the best class of borrowers. 
Here too come in life-insurance companies, which 
illustrate the advantages of credit in a most gratify- 
ing light, and whose action I hope to see extended 
to larger and larger classes of men, since it tends to 
transmute low and selfish cares into a noble care for 
those who are to come after, who might otherwise 
be left penniless dependants, and by elevating and 
enlarging the views of men, to make them better pro- 
ducers and better citizens. In this category of the 
advantages of credit come also the ordinary bank dis- 
counts, made for short periods only, holding the debt- 
or to the strictest rules of payment, only professing 
and only enabled to help customers over the transient 
hard places in their business, and not to furnish the 
funds on which the business is mainly conducted. 
Sums drawn from the banks on credit should only 
form a part of the circulating capital of a business, 
and never be put into the form of fixed capital. The 
passing necessities of a business having an indepen- 
dent basis of its own can be safely and conveniently 
met by bank discounts. So far as the capital stock 
of a bank is made up of small subscriptions, it has 
the advantage just spoken of, of calling otherwise 
idle sums into activity ; and so far as no undue priv- 
ileges are accorded to it by law, there is no branch 
of industry more legitimate and beneficial than bank 
ing. It is no essential part of the functions of a 
bank, that it manufacture and issue money ; the 
money it loans should be the national money ; and 



ELEMENTS OF POLITICAL ECONOJIY. 

if that, unfortunately, be credit money, the elenrient 
of credit in the money should be sharply discrimi- 
nated in the public mind from that element of credit 
by which the bank loans it to its customers. Bank 
credits are good, but that does not prove that credit 
money is good ; and it was one ground of the 
viciousness of the late banking system of the United 
States, that the different kinds of credit involved in 
it were inextricably interwoven with each other in 
the common apprehensions, and when the money 
failed utterly, as it did repeatedly, to answer the pur- 
poses of money, people could not exactly tell whose 
fault it was. 

2. There is another class of advantages in credit, 
which do not depend so much on the transfer of 
capital from less to more productive hands, as on the 
facilities which credit affords in economizing the gen- 
eral operations of exchange. Here the advantages 
are derived from the convenience of settling accounts 
arising out of exchanges, rather than from the char- 
acter of the exchanges themselves. Look, for ex- 
ample, at bills of exchange. They serve to settle up 
the accounts arising from the commerce of two con- 
tinents, with but little transmission of money from 
either, and with but little loss of time. Bills drawn 
in New York on London are usually payable at 
sixty days' sight; and the merchant dispatching a 
ship is able to realize at once the value of her cargo, 
minus interest for the time his bill has to run ; he is 
indeed still liable in part to see that his bill is ulti- 
mately paid by his drawee; but the commercial integ- 
rity of the leading houses in all countries is with 
justice so firmly believed in and acted on, that on the 



ON CREDIT. 

whole but little anxiety springs from this source. It 
is one of the noble things in international commerce 
that men trust each other across the oceans, and lay 
millions of value on the faith of a single firm. Inland 
bills of exchange equally facilitate settlements within 
the country itself; and checks contribute to the same 
end even more simply, passing readily in payments 
wherever the parties are known, and, though credit, 
doing the work of money more convenient!}'-, and 
within certain limits as safely as money itself could 
do it. The face of a check drawn to the amount of 
his deposit in favor of another depositor is trans- 
ferred in the banker's books from the credit of the 
drawer to that of the payee. The banker is released 
from one debt by creating another of equal amount. 
The drawer is released from a debt by causing an- 
other debt to be transferred to the payee. The payee 
is paid by the drawer by the receipt of another debt. 
Thus we see that a release from a debt is the same 
thing as a payment in money ; and we saw in the 
paragraph on bills of exchange that the mutual re- 
lease from debts is the same thing as a reciprocal 
payment of debts. 

3. It is not strange that some thinkers and writers, 
seeing these unquestionable benefits of credit even 
within the peculiar sphere of money itself, have 
come, like Herbert Spencer and many others, to 
think and teach that credit might answer all the pur- 
poses of money. It is certain that it answers some 
of the purposes of money. Suppose A has bought 
of B $100 worth of goods, and B has bought of A 
$125 worth of another kind of goods. Three ways 
are open to close up these transactions. A may pay 



390 ELRSIENTS OF POLITICAL ECON^OMY. 

B and B may pay A in money. This would take 
^225. A may pay B in money, and B may send it 
back with $25 more. This would take $125. Or 
A and B may mutually balance books, and B pay 
the difference in account. This would take $25. It 
is clear, that, as one or other of these methods pre- 
vails in practice, the quantity of money required to 
do the business of a country is very different. So in 
international trade. Foreign bills of exchange lessen 
enormously the quantity of money that would other- 
wise have to be transported. Credit does take the 
place of money in part. Can it take the place of 
money entirely ? I think not. 

We have defined credit as a right not yet realized. 
The denominations of money are certainly needful 
in order to measure this right; and I do not see how 
the denominations of money can be maintained at 
all separately from the use of money itself as a me- 
dium. Moreover, great as is the undoubted power 
of credit, it waits for something beyond itself; it 
waits for realization. I do not see how realization 
can come without the use of money, at least to set- 
tle balances. Further, there always have been hith- 
erto in all commercial countries longer or shorter 
periods during which there was a general reluctance 
to accept the ordinary instruments of credit in ex- 
change. Money, and much of it, was then found to 
be indispensable. The very advantages of credit it- 
self, which have now been explained, are dependent 
on this, that there be underneath it, to support and 
limit it, a solid basis of value-money, in whose de- 
nominations value can be reckoned, in whose coins 
the balances of credit can be struck, and whose pres- 



ON CfwEDIT. -.91 

ence secured everywhere by natural laws alone can 
enable fulfillment to join hand in hand with promise 
If ever credit should usurp the whole domain of 
money, a tolerable standard of value would be no 
longer possible, credit itself would lose its foothold, 
and the vast balloon of promise, sailing for a while 
through the blue, the joy of projectors and the won- 
der of credulous spectators, would descend on a 
sudden collapsed and ruined to the earth. 

4. Besides the two essential functions of banks, re- 
ceiving deposits and discounting bills, they perform 
a variety of other legitimate operations in credit. 
They buy and sell debts of all sorts. They sell their 
own drafts on distant places. The Scotch banks 
have long practised on a system that has proved ex- 
tremely beneficial to Scotland, namely, to create a 
drawing account in favor of a deserving customer, 
who has no deposits in the bank, but who draws out 
and pays in from time to time just as if he had, and 
instead of receiving interest on the daily balance at 
his credit, he pays interest on the daily balance at 
his debit. These are called Cash Credits. Of 
course, only banks can furnish them \vhich have a 
superfluity of credit to sell, and they are safe and 
useful only in communities in which men are well 
known to each other. Some friends of the parties 
thus accommodated always guarantee the bank 
against loss; but the losses have proved to be insig- 
nificant, the gains to be marvelous, and this form of 
credit issued on the basis of no previous transaction 
illustrates better than any other the principle that 
credit is capital. Our own new national banks 
have done an immense business in the national 



392 ELEMENTS OF POLITICAL ECOlSrOMY. 

bonds. They have been instrumental in diffusing 
these bonds among the people. They collect for 
their customers the coupons at maturity. They are 
the factors of the government in exchanging, for 
those who desire it, one species of bond for another. 
For the most part, all these dealings of bankers in 
debts, — and their aggregate amount is enormous, 
— must be enumerated among the advantages of 
credit. 

There are some natural disadvantages in credit. 
The first is, that when it is much given by dealers to 
consumers, the reverse results take place from those 
already characterized, and capital passes out from the 
hands of productive operators and becomes tempo- 
rarily unavailable as Capital. When an industrious 
artisan or merchant has trusted out ^1000 to dilatory 
customers for six months or a year, it is so much 
withdrawn for so long from his active capital, and to 
make up the consequent loss of profit there must be 
an addition to the prices of his wares, and besides 
some bad debts belong to such a system, and there 
must be an additional price to compensate this, and 
thus the customers who pay promptly bear a part of 
the proper burden of the delinquents, who at least 
do not wholly escape, inasmuch as they ultimately 
(if they pay at all) pay a price enhanced by their 
own delay. If the current profit of capital be ten 
per cent., and the merchant sells and gets returns 
five times a year, something less than two per cent, 
profit may be charged to each article, but if he only 
gets returns at the end of the year, ten per cent, 
must be put upon everything. Hence the excellent 
maxim, " Quick sales and small profits." 



ON CREDIT. dyd 

In the second place there is a greater inherent un- 
certainty in values connected with credits than in 
those connected with commodities, or than in those 
connected with personal services. We have already 
seen that value has its sphere of operations in the 
past, in the present, and in the future. There is un- 
certainty connected with what has been done in ref- 
erence to value, as the market may prove to have 
been miscalculated, and the commodities to have 
become unsuitable ; there is uncertainty connected 
with what is noio being done m reference to value, 
as the service bargained and being paid for may be 
less skillful than is supposed; but from the nature 
of the case there is greater uncertainty connected 
with what is to be done in reference to value, be- 
cause in the first two cases some of the conditions 
are already fixed, while in the last all of them are at 
least open to hazard. There is sufficient certainty 
in all three to justify, and probably to reward opera- 
tions in reference to value, but credits are naturally 
more sensitive in the law of their value than either 
commodities or services. 

In the third place, and largely in consequence of 
what has just been expressed, credit-exchanges are 
more likely than others to be unduly multiplied 
and to fail of ultimate realization in full. No more 
bales of cotton can be actually bought than are ac- 
tually produced, and no more men can be hired than 
are willing to work ; but there may easily be, and 
often are, more transactions on the strength of a 
prospective cotton crop than the crop itself can pos- 
sibly realize; and hence credits, whose sphere is the 
future, though legitimate and potent, lie in a field 
that adjoins the field of gambling. Gambling occu- 



394 ELEMENTS OF POLITICAL ECOXUMY. 

pies the field of chance. Credits occupy the field of 
probabilities. Is speculation proper? That depends 
on the meaning of the word " speculation." If "to 
speculate" means to buy anything with an expecta- 
tion based on rational probabilities of being able to 
sell it again under different conditions at a higher 
price, speculation is proper and beneficial to the 
public — values of things thus bought and sold nei- 
ther fall so low nor rise so high as they otherwise 
would do, which is a public gain. But if to "spec- 
ulate" means to buy and sell on chances merely, it 
is gambling, and what one gambler makes another 
loses. Under a sound money, healthful public opin- 
ion, and good law, gambling never can become 
formidable ; and it is very plain, that the limits and 
conditions of legitimate credit are the limits and 
conditions of rational probability. 

In the fourth place, the principal disadvantage of 
credit is seen in its action on prices through in- 
creased demand, and in its consequent tendency to 
produce commercial crises. A man's whole pur- 
chasing-power is made up of three things: first, the 
property in his possession ; secondly, the value that 
is owed to him ; thirdly, his credit. He can buy 
value with these three things; and his power to 
buy is exactly measured by the sura of these three 
things. But while the first two are limited and as- 
certainable, the third, credit, is in a certain sense 
unlimited. Being based upon confidence, which is 
itself a variable quantity, a man's credit at one time 
may be vastly greater than at another, compared 
with his real property ; and if he have the reputation 
of doing a safe and regular business, and is favored 
by circumstances, he will find himself sometimes 



ON CREDIT. 895 

able to buy on credit to an extent out of all proper 
proportion to his capital. Instances are given of 
dealers, who, in times of speculation, have effected 
purchases to an extent seventy or even one hundred 
times greater than their capital. And on the other 
hand, in times of panic, men of known character 
and of financial solidity find it impossible to borrow 
a dollar. 

While these pages are passing through the press, 
there has occurred a fresh illustration on a great scale 
of the principles just mentioned. The commercial 
panic of September, 1873, will long be memorable 
for the prominence of the houses carried down by 
it; for the proof it furnishes that an immense vol- 
ume of paper money made legal tender rather invites 
than prevents a crisis; for the illustration it gives 
that the instincts of men are sometimes better than 
their logic; and for its unanswerable demonstration 
of the tendency of credit-enterprises, when stimulated 
by credit-money, to outrun the limits of prudence. 

Now money acts upon prices only by being offered 
in exchange for commodities ; but we have seen that 
commodities may be purchased by credit as well as 
by money ; when, therefore, credit is offered and re- 
ceived for commodities, it has the same influence 
upon prices, as when money is offered and received 
for them. The form which the credit assumes to 
effect the purchase is a matter of indifference, whether 
bank-notes, checks, bills of exchange, or book-credits, 
what acts upon prices is the credit, in whatever shape 
given, or whether it gives rise to transferable paper 
or not. 

It follows from this, that whenever there is an ex- 



396 ELEMENTS OF POLITICAL ECONOMi'. 

tension of credit for the purpose of purchasing, there 
will be a corresponding rise of prices. He who em- 
ploys both his cash and his credit in purchasing, 
creates a demand for the article to the full amount 
of his money and credit taken together, and raises 
the price proportionally to both. 

Tliere might be a simultaneous rise of price in 
several commodities, and a considerable spirit of 
speculation manifested in these, if there were no such 
thing as credit and all business were done by ready 
money ; but there could not be a general rise of 
prices as to all commodities; for, while men spent 
more money on the few commodities, and they rose 
in price, they would have less money to spend on 
other commodities, and these would not rise, but 
rather fall. It is only when credit can be used freely, 
and increased purchases can go on in all departments 
at once, that there can be a rise of prices as to all 
commodities, and a universal spirit of speculation. 

At such times, and while prices are still rising, 
men seem to be making great gains ; those that sell 
while the fever is on do make great gains ; and they 
not only use their credit freely, but they really have 
more credit to use, from the very fact they seem to 
be prosperous. Everybody wishes to extend his 
operations to the utmost limit, in order to realize the 
greatest possible gains. Everybody wishes to use 
not only all his money, but all his credit. Every- 
body desires accommodation, and accordingly every- 
body gives accommodation. All forms of indebted- 
ness are greatly increased. Promissory-notes, bills 
of exchange, book-credits, are indefinitely multiplied 
in all directions. 



ON CREDIT. 397 

It begins now to be perceived in certain quarters, 
that the thing has been overdone ; speculative pur- 
chases cease; banks become more particular what 
paper they discount; operators consequently find it 
more difficult to sell their debts in order to meet 
their own obligations; they fall back necessarily 
upon the sale of their commodities ; when holders 
of commodities are anxious to sell, prices begin to 
fall ; under falhng prices it becomes still more diffi- 
cult to sell debts, and even to sell commodities, be- 
cause few people wish to buy when a market is 
falling; a panic often sets in, more irrational if pos- 
sible than the previous over-confidence ; their in- 
flated wealth in credits and commodities collapses 
in the hands of the holders ; but men must realize 
something from their property, and sell it therefore 
frequently at great sacrifices; but the amounts of 
money thus realized, and all the loans that can be 
extorted in the crippled state of credit, are inade- 
quate to meet the maturing debts contracted when 
confidence was high; men fail, and must fail; they 
besiege the banks with which they deal, sometimes 
piteously and sometimes bitterly, for accommoda- 
tion ; but the banks cannot help them, or think they 
cannot; the failure of some causes the failure of 
others, who hold the debts of the first; and so wide- 
spread commercial disaster comes in. Such crises 
swept over this country in 1837 and in 1857, and 
a recurrence of them is to be looked for. They 
always arise from disordered credits, and though not 
necessarily connected with credit-money, are more 
likely to come in connection with that. The more 
strong and conservative the banks maintain their 



898 ELEMENTS OF POLITICAL ECONOMY. 

ordinary condition, the more powerfully can they 
operate to prevent or abate a panic. They ought 
always to be on the shore and never in the stream. 
They ought to be able to offer credit on approved 
securities on all occasions whatever ; for it is not 
money so much that is needed to allay a panic, nor 
even credit actually given, as it is a knowledge that 
abundant credit can and will be given. As a panic 
becomes imminent, banks ought to be able to extend 
their discounts freely ; and the permission to do this, 
contrary to the Bank Act of 1844, given by the gov- 
ernment to the Bank of England, has on three sev- 
eral occasions acted like a charm to still the rag- 
ings of a commercial storm. Without this reserved 
power centered somewhere to give credit, and to 
some extent even after its prompt exercise, distress, 
more or less extensive, is the invariable consequent 
of the series of events called a commercial crisis. 
That series is constituted somevvhat in this manner: 
first, business a little brisk ; second, confidence and 
credit enlarging; third, a spirit of speculation; fourth, 
a vast increase of all forms of debt ; fifth, the revul- 
sion, or what may be called the cascade of discredit; 
sixth, stagnation and distress. 

A national debt is a mortgage upon the national 
property and income. It is sometimes considered as 
a blessing, but is more generally and truthfully re- 
garded as a burden. It is not denied that incidental 
advantages may spring up in connection with it. 
The bonds, which are the evidences of the debt, open 
a convenient form of investment for presently inact- 
ive capital and for trust-funds of all kinds. There 
can be no doubt, I think, that certain classes of per- 



ON CREDIT. 899 

sons holding these national obligations are won to a 
stronger loyalty and become firmer friends to stabil- 
ity in government ; but this consideration applies 
mainly to new governments, and to those tempo- 
rarily endangered. Both England and the United 
States now make a portion of their public debt the 
basis of a national system of banking ; but it is very 
questionable whether this can be mentioned among 
the incidental benefits of the debt. Again, " a mod- 
erate debt adds to the credit of a nation, and its abil- 
ity to raise money in an emergency, for bankers and 
hapitalists are more ready to take such securities as 
they are in the habit of dealing in." ^ 

The burdens of a national debt are very apparent. 
During the fiscal year closing June 30, 1867, the 
United States paid out in interest |143,781,592; 
and between the 1st of March, 1869, and the 1st 
of August, 1873, it paid towards the principal of 
the debt $378,015,065. These vast sums came out 
of the industry and income of individuals. They 
came through taxation of individual proprietors of 
value ; and taxation to any such degree as this is a 
great disturbance to industry, and gives rise to an 
army of officials who consume a considerable per- 
centage of all they collect. The collection of the 
internal revenue for the fiscal year 1867 cost $7,712,- 
089. Moreover, the various expedients of taxation, 
which are always practically unequal in their opera- 
tion, give rise to irritation and political agitation, and 
even sometimes to threats of repudiation, especially 
when the occasion has gone by under which the debt 
was contracted, and a generation is called upon to 

1 Communication from Sidney Homer. 



400' ELEMENTS OF POLITICAL ECONOMY. 

liquidate a debt which it had no agency in creating. 
And here the vexed question arises, how far one 
generation has a right to throw upon succeeding 
ones the burdens of a national debt ? I answer, that 
it has a very limited right indeed. The opposite 
doctrine tacitly implies that succeeding generations 
will have no occasion for extraordinary expenses 
of their own, and therefore may rightfully be made 
to contribute to the extraordinary expenses of this 
generation. But it is pure assumption to take for 
granted that the next generations will not have, of 
some kind or other, as much occasion for an extraor- 
dinary effort in the way of defence or of improve- 
ment as the present generation has had. It is an 
illusion to estimate what has now to be done as of 
much more importance than what will have to be 
done. Therefore to throw our burden forward on 
another generation that may have its own peculiar 
effort to make, just as great and just as imperatively 
called for, is an unwarrantable procedure. The view 
that has prevailed in practice, that a great war-debt 
for example, might be cast with facility upon pos* 
terity, has given rise to needless and expensive wars ; 
and^/^e^/ have been called upon to pay who perceive 
the utter inutility of the expenditure. Thus bitter- 
ness has been added to burden. Besides, the men 
to fight the battles, and the capital by means of 
whicli to feed, clothe, and furnish them the muni- 
tions of war, must come from that ge^ieration; and 
there is always great injustice in the manipulations 
of a debt ostensibly incurred to obtain this capital, 
and the debt itself is usually in large part rather a 
memorial of the war than the means bv which its 



ON CREDIT. 401 

expenses were actually defrayed. The present gen- 
eration of American citizens was called on to do an 
important thing in suppressing a civil war, and in 
eradicating a social institution that was thoroughly 
bad ; the expense of doing this was many fold en- 
hanced by timid counsels in the field, by class legis- 
lation in Congress, and by wretched financiering in 
the Cabinet ; but the debt, vast as it is, and unnec- 
essarily incui'red as a portion of it was, can all be 
paid off, must all be paid off, by the generation that 
incurred it. 

How can this desirable result be best reached ? 
First of all ought the United States legal-tender 
notes to be called in and cancelled. They are a por- 
tion of the unfunded debt, and no interest accrues 
upon them, but they have been mischievous and 
wasteful in their effects upon industry and business. 
Their introduction would not have been so harmful, 
if, contemporaneously with it. Congress had forbid- 
den the further circulation of State bank bills. These 
latter were largely increased along with large issues 
of the national notes. The currency became thor- 
oughly debauched. The measure of value became 
as variable as the drift of the winds. Prices became 
universally and abnormally high. Business became 
feverish, and speculation rife. When, after a long 
interval, the State bank bills were retired under a 
heavy tax, the national bank bills were ready to take 
their place, and these, together with the legal-tender 
notes and fractional money, now swell the volume 
of the currency to nearly eight hundred millions 
($754,000,000) of paper money, every dollar of it 
practically irredeemable, and every dollar of it de- 

26 



402 ELEMENTS OF POLITICAL ECOMOMY. 

predated (September 30, 1873) thirteen per centum. 
The country is suffering in every one of its leading 
interests, domestic and foreign, from the influence of 
this inferior money. Trade is languishing ; and the 
poor especially are experiencing the truth of the oft- 
quoted remark of Mr. Webster, that the most suc- 
cessful expedient ever devised to cheat the laboring 
classes of mankind is irredeemable paper money. 
Let then, the national legal-tender notes be steadily 
withdrawn. They have cheated creditors and re- 
lieved debtors of their just obligations. They have 
made it impossible for other forms of value-money 
to come into circulation. Their presence in the cur- 
rency depreciates the value of the national bank 
bills, and puts off the day of specie payments. Let 
their career of mischief be concluded. 

In respect to the funded debt, we are paying the 
interest promptly, and handsomely reducing the prin- 
cipal. Some of the six per cent, bonds have been re- 
funded in five per cents, and thus the burden of inter- 
est has been lessened ; but, after all, the vital ques- 
tion now is, not How shall we pay off or refund the 
bonds? but, How shall we pay off the greenbacks? 
The bonds are not due yet for many years, but the 
legal tenders have already been due many years, and 
the government still dishonors its own promises to 
pay. Greenbacks are promises to pay gold dollars, 
and have no other possible meaning, and government 
is every day culpable while it does not take efficient 
measures to redeem these promises. Once in posi- 
tion to do this, the question late agitating the coun- 
try about paying off a part of the bonds in greenbacks 
answers itself. How can a promise to pay be the 



ON CKEDIT. 403 

same thing as the pay itself? And how can a nation 
pretend to fulfill one set of promises by compelling its 
holders to accept another set of promises? The only 
proper basis of a promise is the free trust of the re- 
ceiver in the good faith of the promisor. To compel 
men to accept a promise is a monstrous incongruity. 
To make the greenbacks a legal tender was bad 
enough ; to pay off the bonds with them would be 
enough worse. No! The greenbacks must first be 
paid in gold to every man who demands gold on them ; 
this is absolutely necessary to national good faith ; 
and then the bonds, if the principal be paid at all, 
which is not absolutely necessary to national good 
faith, since the terminable bonds may be changed 
into Consols with the consent of the holders, must 
be paid in gold to the last farthing. 

The price of the bonds, since they bear gold inter- 
est, has always been higher than the price of the 
greenbacks, in gold. Still, the bonds have not been, 
till very recently, at par. The average cost in gold 
of all government purchases of six per cents between 
May, 1869, and March 15, 1871, was exactly |92.18 
for each $100 bond.^ All the different issues of six 
per cents are now some above par, and the ten-forty 
five per cents are worth about 100 cents on the dol- 
lar. The government itself realized from the original 
sale of most of these bonds scarcely three fourths in 
gold of their face value. On the whole, the value 
of the evidences of the public debt is appreciating. 

The debt itself is now about $2,150,000,000. The 
English debt is somewhat less than $4,000,000,000. 
much of it in the form of Consols, whose peculiarity 

1 Hunt's MivclanCs Year-Book, 1871. 



404 ELEMENTS OF POLITICAL ECONOMY. 

is, that they never fall due, so as to be a claim for 
the principal against the government; but are, after 
a day fixed, always redeemable at the will of govern- 
ment at par. The ordinary price of Consols, which 
bear three per cent, interest, is about 94. The ad- 
vantages, to a government, of a debt always redeem- 
able, but never payable, are obvious at first sight. 
All our funded debt issued before I860 is made pay- 
able on a day certain. The so-called Consols of 
1865, 1867, and 1868, are payable not more than 
forty years from date ; while the new bonds of 1870 
are Consols proper, redeemable, the five per cents 
after ten, the four and a half per cents after fifteen, 
and the four per cents after thirty years. That they 
may be paid in gold will require an economical 
administration of government ; an avoidance of 
intervention in the affairs of our neighbors, and of 
entangling alliances with foreigners ; a free commer- 
cial system, under which duties shall be adjusted 
only for the most productive revenue ; and a con- 
stant and onerous home taxation. 



ON FOREIGN TRADE. 405 



CHAPTER XIII. 

ON FOREIGN TRADE. 

The principles which determine the questions of 
foreign trade have been already unfolded in these 
pages. It is only because their application to the 
wider field of international exchanges has been con- 
tested by some persons, who have conceded their 
validity within the boundaries of the individual na- 
tions, that it is now needful to bestow upon the sub- 
ject a separate treatment, to demonstrate that the 
laws of exchange are universal and not partial, that 
the accident of a different nationality has nothing to 
do with the motives or the gains of the two parties 
to an exchange, and also to attempt to answer with 
thoroughness and candor the objections that have 
been raised against the freedom of international ex- 
changes. Here, as everywhere else within the science 
of political economy, the safe appeal lies to the com- 
mon sense of men. The scientific mind sees the ab- 
surdity at once of attempting to apply one set of prin- 
ciples to domestic exchanges and an opposite set to 
international exchanges, since a science is of neces- 
sity general, and its principles, if sound, must apply 
to every possible case of the whole class ; and the 
common raind as well can be made to see with en- 
tire clearness that artificial obstacles put in the way 
of the freedom of exchanges invariably involve both 



406 ELEMENTS OF POLITICAL ECONOMY. 

injustice and loss. It is only necessary to take the 
simplest cases first, display familiarly the principles 
applicable to them, and then with the clew well in 
hand, to pass on through the more intricate portions 
of the subject. A writer, whose simple purpose is 
to reach the truth, who has no personal interest in 
either defending or overthrowing a dogma, will not 
confuse the understanding of his readers, and his 
ow^n, by leaping at once into the thick complications 
of this large subject. Here is a good test of men 
and of methods. The confusions prevalent upon 
the matter of foreign trade are in a measure the re- 
sult of this false method pursued in discussing it, — 
a method which, however favorable it may seem to 
the apparent establishment of certain maxims, can 
never be made useful in the investigation of truth. 
It may be considered as a point already well settled 
b)' experience, that no man's sagacity is sufficient to 
guide himself or others to any sound conclusions on 
this field, who takes his stand at the outset amid the 
whirl of interlocking phenomena, and then endeavors 
to work himself out through the entangling meshes 
which surround him at every step. Happily, there is 
no need of any such procedure. Man is man, motive 
is motive, and exchange is exchange ; and the ap- 
parent chaos of commerce can be resolved through 
these alone into harmony and order. 

In our fourth chapter it was put, I believe, beyond 
the reach of controversy or cavil, that the only reason 
why men ever exchange services at all, is on the 
ground of a relative superiority at different points. 
This relative superiority at different points was 
shown to depend in individuals partly on natural 



ON FOEEIGN TEADE. 407 

gifts, partly on concentration of mind, or muscle, or 
both, on a single class of efforts, and partly on the 
use and familiarity in the use of the gratuitous helps 
of Nature aiding that class of efforts. The tailor 
makes the blacksmith's coat, and the blacksmith 
shoes the tailor's horse, for no other reason in the 
world, except that each has a relative advantage of 
the other in his own work, and therefore there is a 
mutual gain in their exchanging works. To pretend 
that there would be any exchange between them, in 
case the blacksmith could make coats as well as the 
tailor, and the tailor shoe horses as well as the black- 
smith, would be to assert that man acts without a 
motive, and that exchanges take place without a 
gain. It was also shown in the same connection, 
that the greater the difference of relative advantage, 
the greater the gain of an exchange, because each 
purchases the service of the other at the rate of his 
own highest efficiency. To recur to the same ex- 
ample, while the efficiency of the tailor and the 
blacksmith each in his own trade remained at 6, the 
efficiency of each in the trade of the other being at 
5, there was only a gain of 2 to be divided between 
them ; but when by concentration and application 
the efficiency of each in his own trade rose to 15, his 
efficiency in the other remaining at 5, there was a 
gain of 20 to be divided between them. When the 
relative superiority of each over the other in his own 
trade was low, the gain, though sufficient to justify 
the exchange, was small ; but when the difference of 
relative advantage increased, just in that ratio did the 
exchange become more profitable to both. The obvi- 
ous inference from this, then drawn, and now re- 



408 ELEMENTS OF POLITICAL ECONOMY. 

peated, is, that every person who exchanges with 
others is directly interested in the highest efficiency 
and success of their efforts as well as his own. The 
diversity of relative advantage at different points 
exhibited by different nations, and consequently the 
gains of international exchange, were expressly re- 
served at that point to a later stage of our inquiry 
That stage is now reached. 

The various countries of the earth have received 
from the hands of God a diversity of original gifts, 
in climate, soil, natural productions, position, and 
opportunity. This diversity exists for a good de- 
sign, and can never be substantially reduced by man, 
even if there were, as there is not, any good reason 
for desiring to reduce it. Besides original diversity 
in these respects, there has been developed in the 
history of the inhabitants of these countries, a diver- 
sity of tastes, aptitudes, habits, strength, intelligence, 
and skill to avail themselves of the forces of Nature 
around them. These differences are somewhat less 
inherent and more flexible than the others, but they 
exist, and always have existed, and in a greater or 
less degree always will exist ; and it is on these diver- 
sities, original, traditional, and acquired, that inter- 
national commerce depends ; it never would have 
come into existence without them, and it would 
cease instantly and completely were they to fade 
out. Men do not engage in foreign trade for fun ; 
they engage in it for the sake of the mutual gain 
derivable to both parties ; they desist from it so soon 
as that mutual gain disappears ; and there is no 
mutual gain in any series of exchanges, unless each 
party has a superior power in producing that which 



ON FOREIGN TRADE. 409 

is rendered, compared with his power in producing 
that which is received. We will suppose a trade 
between England and France in cottons and silks, 
England sending cottons to France, and France 
sending silks in return. When and how long will 
this be a profitable trade ? Then, when efforts be- 
stowed in France upon silks will procure, through 
exchange with England, more of cottons than the 
same amount of efforts bestowed in France upon 
cottons will produce of cottons directly ; and then, 
when efforts bestowed upon cottons in England will 
procure more of silks, through exchange with France, 
than the same amount of efforts bestowed in Eng- 
land upon silks will produce of silks directly. So 
long as there is a difference of relative efficiency in 
the production of the two commodities in the two 
countries, so long, setting cost of carriage aside, may 
there be a profitable exchange of the two. To make 
such an exchange profitable to both parties, it is not 
at all needful that the cottons exchanged for the silks 
shall have cost the English as many days' labor as 
the silks may have cost the French ; or that the silks 
shall cost the French as much as the cottons cost the 
English ; it is not a question of the absolute cost of 
either commodity to the parties producing it ; but a 
question of the relative cost of that produced in 
either country compared with what would be the 
cost of the other commodity were it to be produced 
in that country. The question for the Frenchman 
is, Can I get more cottons by working on silks 
for a month, and then trading with England, than I 
can get by a month's work on cottons at home ? And 
the question for the Englishman is. Can I get more 



410 ELEMENTS OF POLITICAL ECONOMY. 

silks by making cottons, and then trading with 
France, than I can get by trying to make silks at 
home? As this point is fundamental, and deter- 
mines the whole matter of foreign trade, it shall be 
illustrated arithmetically. Suppose that cottons 
costing ^100 in England exchange for silks costing 
$80 in France : is that a losing trade for England 1 
Not necessarily. Is it a remunerative trade for 
France? Not necessarily. It depends simply upon 
this: whether $100 expended in England in the 
manufacture of silks will produce as many and as 
good silks as can be obtained for $100 by exchange 
with France ? If it will, depend on it, that $100 
will never go to France to buy silks. If it will not, 
and silks are in demand in England, then, clearly, 
the trade is advantageous to the Englishman. If 
the cottons costing $100 in England, and obtained in 
exchange for silks which cost but $80 in France, can 
there and then be made for $75, France makes a 
losing trade (but only by supposition), though she 
gets what cost $100 for what cost but $80. My 
readers will perceive, that it is not the absolute cost 
of commodities to the countries producing them that 
determines their value in foreign trade, but that cost 
relatively to what w^ould be the cost of the return 
commodities were they to be grown or manufactured 
there. A demand in each country for the product 
of the other is of course presupposed in the illustra- 
tion. 

If this general representation be just, and I think 
every thoughtful person will concede it, then it fol- 
lows, that, setting aside a greater cost of carriage, 
foreign trade presents no elements peculiar to itself, 



ON FOREIGN TRADE. 411 

but only the same elements which domestic trade 
presents; and consequently, that the same laws and 
limitations applicable to domestic exchanges are ap- 
plicable also to foreign exchanges. As in every other 
exchange, so here, there are two efforts, represented 
in this case by the cost of the respective commodi- 
ties, — the cottons $100, and the silks $80 ; there are 
two desires, — the desire of the Englishman for silks, 
and of the Frenchman for cottons ; there are two 
estimations, — the estimation of the Frenchman of 
the effort in silks required to obtain the cottons by 
exchange compared with the effort required to obtain 
them directly, and the Englishman's estimation of 
his effort in cottons necessary to procure the silks in 
exchange, compared with what would be the effort 
needed to manufacture the silks in England; and, 
finally, as always, two satisfactions. 

Now let us further suppose that while the cottons 
cost $100 in England, it would cost $120 to manu- 
facture there as good silks as can be made in France 



for $80 ; and that while the silks cost but $80 m 
France, it would cost $96 to make cottons there as 
good as the English can make for $100. On this 
supposition, France can make both silks and cottons 
at a cheaper absolute cost than England can. But 
does that destroy the motive and the gain of an ex- 
change between the countries in these two articles ? 
Let us see. By exchange with England, France 
gets for $80 in silks, cottons which would otherwise 
cost her $96, — a handsome gain of 20 per cent. ; 
England gets for cottons costing her $100 silks 
which would otherwise have cost her $120, — another 
handsome gain of 20 per cent. Though France can 



412 ELEMENTS OF POLITICAL ECONOMY. 

make each commodity for less absolute money than 
England can make either, there is a diversity of rela- 
tive advantage, and therefore there might be in this 
case, as there is actually in many such cases, a prof- 
itable trade. The efficiency of France in making 
silks, relatively to that of England in making silks, 
is in the ratio of 80 to 120, — a difference of 50 per 
cent. ; while the efficiency of France in making 
cottons, relatively to that of England in making the 
same, is only in the ratio of 96 to 100, — a difference 
of 4i per cent. In the majority of cases, doubtless, 
foreign trade takes place in articles, in the production 
of one of which each of the respective countries has 
an absolute advantage over the other, but an every 
way advantageous trade may be carried on in articles 
in the production of both of which one nation shall 
have an absolute superiority over the other, provided 
only that this superiority be relatively diverse in the 
two articles, as has just been shown. This is an 
effectual answer, as I take it, to the clamor of some, 
who object to importing articles which might be 
made at home for the same sum of money as for- 
eigners expend in making them ; admitted, that they 
might be so made; does it follow that the country 
importing them would get them as cheaply by 
making them itself ? By no means does that follow. 
By the supposition, the importing country has an 
efficiency in making those articles equal to that of 
the foreign country ; but it may also have a superi- 
ority absolute or relative over that country in the 
production of other articles which that country wants 
in exchange ; if so, the exchange complained of may 
go on to the manifest profit of both parties. Our 



ON FOEEIGN TEADE. 413 

general supposition a little changed will put this case 
in its true light : France can make cottons for $100 
which it costs England also $100 to make ; shall she 
give up her trade with England in silks and cottons, 
because she can naake cottons as cheap as England 
can ? She had better not. Let the exchange go on ; 
for $80 in silks she gets cottons which would other- 
wise cost her $100, — a gain of 25 per cent. ; Eng- 
land gets silks for $100 which would otherwise cost 
her $120, — a gain of 20 per cent, as before. Let no 
nation be in haste then to drop a trade, because it 
thinks it can make the article received in exchange 
as cheaply as the other nation makes it, so long as it 
has an advantage over the other, absolute or relative, 
in making the article rendered in exchange ; and when 
tha": advantage ceases, the trade will drop of itself. 

What will be the extreme limits of the value of 
cottons and silks in a trade between England and 
France under the conditions supposed ? And when 
will a third nation be able to undersell either in 
the ports of the other? The extreme value of 
French silks in English cottons, will be 80 and 96 ; 
they cannot fall below 80, because they cost the 
French that to produce them ; they cannot rise 
above 96, because at that rate the French can make 
cottons, and there would be no gain in exchanging. 
Nations, no more than individuals, will get them- 
selves served at a greater effort than that at which 
they can serve themselves. If a given effort does 
not realize more through exchange than it would 
directly, then the exchange ceases of necessity, as 
fire goes out for lack of fuel. The extreme limits of 
the value of English cottons in French silks, will be 



414 ELEMENTS OF POLITICAL ECONOMY, 

100 and 120, for reasons precisely similar. There- 
fore the highest profits possible to both nations, 
under the conditions of the trade, are 20 per cent, 
each. France would be glad to take the cottons at 
a return of 80, at which rate her gain would be 20 
per cent. ; and she cannot under any circumstances 
offer quite 96, at which rate her gain would disap- 
pear No third nation, therefore, in a trade of silks 
for cottons, can expel the French from the English 
ports, until it is prepared to offer nearly 96, or 
more, in silks in return for English cottons; that 
is to say, until its efficiency in making silks rel- 
atively to that of England in making them, presents 
a greater difference than the difference of efficiency 
between France and England in making silks, that 
is, greater than fifty per cent. A greater difference 
of relative advantage, and nothing else, will enable 
a third nation to undersell France in such a trade. 
England would be glad to take the silks at a return 
of 100, at which rate her gain is 20 per cent. ; and 
she cannot possibly offer quite 120, because at that 
rate her gain would wholly vanish. She could be 
undersold in the French ports, under similar condi- 
tions, and not otherwise, as the French in her own 
ports, as just now indicated. We have seen that 
the diversity of relative advantage in the production 
of the two articles in the two countries is in the 
ratio of 50 to 4^ ; France has an absolute advantage 
in the production of both commodities ; the trade 
proceeds simply on the basis of this relative diver- 
sity ; and no nation can take away the silks of 
France from England, or the cottons of England 
from the French, either with other cottons and silks, 



ON FOREIGN TRADE. 415 

or any other commodity, except on the basis of a di- 
versity, absolute Qr relative, greater than this- Here 
is the whole doctrine of one nation's underselling an- 
other in the ports of a third. It can do so under condi- 
tions of greater relative efficiency, and not otherwise. 

So far we have considered only their relative cost 
of production as determining the value of articles in 
foreign trade. But we know that the element of 
desires also helps to determine all value. We come 
now to illustrate what is sometimes and properly 
called "the Equation of International Demand." 

If the demand for French silks in England just 
answers to the demand for English cottons in France, 
so that the silks offered by France just pay for the 
cottons offered by England, then, cost of carriage 
aside, the gains of the trade will be equally divided 
between the two nations, each will realize 20 per 
cent, profit, because neither will have any motive to 
lower the value of its commodity below its highest 
value ; France, from its point of view, will offer 80 in 
silks and get 96 in cottons ; England, from her point, 
will offer 100 in cottons and get 120 in silks. Demand 
and supply are equalized at a point of value most 
favorable to both parties, and really determined by 
the relative cost of production. This case of equali- 
zation, though possible, is likely rarely to occur in 
practice. On any terms of exchange first offered, 
there is likely to be a stronger demand in one country 
for the product of the other than in this country for 
the product of that. This will lead to a change of 
value, and a new division of profits. The product 
for which the demand is less will find its market 
sluggish, and in order to tempt further and brisker 



416 ELEMENTS OF POLITICAL ECONOMY. 

exchanges, will be compelled to offer more favorable 
conditions. He who enters a market in quest of 
what is more in demand with a service in return 
which is less in demand, will have to lower his 
terms, or not ti'ade. The equalization of supply and 
demand will only be reached in this case, by quicken- 
ing the demand for the commodity now less in 
demand, through an offer of better terms in trade. 
Thus, if the demand for French silks in the English 
ports be slack, in comparison with the demand for 
English cottons in France, at the rate of exchange 
first established — 80 for 96, the French merchant has 
no resource, if he wishes to continue the trade, but to 
offer more silks for the same amount of cottons, say, 
85 for 96. If this reduction prove sufficient to can- 
cel the account in cottons with the account in silks, 
then the trade will go on on this new basis for a 
while, the equalization of supply and demand has 
been reached through a new valuation of the com- 
modities, and there is now a different division of the 
profits. France gains less than 13 per cent, by her 
trade with England, while England gains 27.7 per 
cent, in her trade with France. Under these new 
terms of exchange, it is possible that silks may again 
become heavy in reference to cottons, and a new de- 
cline take place in their relative value. If the French 
are obliged to offer 90 for 96, in order to obtain the 
cottons they want, their profits will sink to 5.5 per 
cent., while the English profits will rise to 35 per 
cent. If, in any contingency, the French were com- 
pelled to offer in the neighborhood of 96 in silks for 
96 in cottons, the trade would cease of course, just 
as every other transaction ceases when the motive 



ON FOItKKJN TUADK. 417 

for it ceases. Of course, the cottons are just as likely 
to become dull in reference to silks, as the silks to 
cottons, and in this case England must lower her 
demands, and thus surrender a larger share of the 
profits to France. By the play of sup|)ly and 
demand, within the outermost limits drawn by the 
relative cost of production, is the value of articles 
determined in foreign trade; and no degree of com- 
plication in the variety of articles, or in circuitous ex- 
changes, affects, for substance, these fundamental 
principles. For example, if, instead of one article, 
33 cottons, England sends two articles, or ten, to 
France in payment for silks, she will send in prefer- 
ence that article in which her labor is relatively most 
efficient, so long as the French demand v/ill receive 
it; then, when obliged to lower on that down to the 
point at which her next most available article stands, 
she will send that in quantities regulated by the 
demand for it; and so on to the end. No matter 
whether the articles be one or many; no matter 
whether the trade be a direct, or an indirect, trade ; 
the profits in all cases will depend, first upon the 
ratio of the cost of what is rendered to what would 
otherwise be the cost of that received ; and secondly, 
upon the relative intensity of the two demands. The 
greater the relative efficiency of any nation in pro- 
ducing an article of export, and the stronger the 
demand for that article in foreign ports, the more 
profitable does the trade become to that nation. 
The precious metals, whether produced at home, or 
obtained from other nations by another series of ex- 
changes, stand here in the same relations as other 
commodities, and are frequently the most profitable 

27 



418 ELEMENTS OF POLITICAL ECONOMY. 

articles that a nation can export. The terms of in- 
ternational exchanges, then, between any two na- 
tions, are so adjusted, as to equalize the demand for 
their respective products, and cancel the debts mutu- 
ally incurred. 

It follows from all this by a necessary inference, 
that what a nation purchases by its exports, it pur- 
chases by its most efficient labor, and consequently 
at the cheapest possible rate to itself. Only those 
things, for the procuring of which a nation possesses 
decided advantages relatively to other nations, and 
relatively to its own advantages in producing directly 
what is received in return, are ever exported ; and 
hence, the return cargoes, no matter what they have 
cost their original producers, are purchased by this 
nation as cheaply as if they had been produced by its 
own most advantageous labor. This is a wholly im- 
pregnable position, and the advocates of restricting 
foreign trade are challenged to try their hand a little 
at its defences. 

We see also, at this point, what to think of those 
people who deem it needful that each nation should 
be able to " compete " wnth other nations in every- 
thing. Why are not these people consistent enough 
to apply their favorite doctrine of "competing" to 
domestic exchanges also, and demand that the cler- 
gyman shall have facilities for "competing" with the 
lawyer, the tailor with the blacksmith, the farmer 
with the manufacturer, the publisher with the author? 
Will these people never learn that all exchanges, do- 
mestic as well as foreign, depend on relative supe- 
riority at different points, and that a nation which 
should try to make its success in production equal at 



ON FOREIGN TRADE. 419 

all points, would be as foolish as an artisan trying to 
learn and practise all trades at once ? Suppose the 
nation to succeed, what then ? It would supply its 
wants at a certain average efficiency of effort; whereas, 
by a thorough development of all its own peculiar 
resources, it could command by exchange the prod- 
ucts of the world at a cost not exceeding that of itfl 
own most productive and efficient exertion. In one 
word, whatever justifies individuals in selecting di- 
verse paths oC production according to their capaci- 
ties and opportunity, the same justifies the nations 
in fully drawing out their own best capabilities under 
the conditions in which God has placed them, and 
then, exchanging what costs them little for what 
would otherwise cost them much, in enjoying all that 
the world offers at the least expenditure of irksome 
eftbrt. Such action promotes the common good of 
all the nations, and makes the best of all accessible 
to all, and arms each with the power of all ; while 
the opposite action, by lessening the diversities of 
relative advantage, so far forth incapacitates all for 
exchanges which are at once profitable and stimu- 
lating. 

Closely connected with the one just cited, is an- 
other narrow and superficial notion, happily less 
prevalent now than formerly, namely, that new im- 
provements in machinery, or other enhanced facili- 
ties of production, realized in any nation, are a dis- 
advantage to other nations in their trade with that 
nation. Let us examine this point. Suppose France, 
by new methods of silk culture, to become able to 
make the silk which before cost $80 for $50, cottons 
in France, and silk and cottons in England, remain- 



420 ELEMENTS OF POLITICAL ECONOMY. 

ing in natural cost as before, does France alone gain 
the entire a.dvantage of the increased cheapness of 
silk ? We will see. The production of silk in 
France is greatly quickened by the cheaper meth- 
ods, more is produced, more is carried to England to 
buy cottons with, but at the old rate of 80 for 96 
the English will not take any more silks, and the 
French, who can now abundantly afford it, since 
their nominal 80 is really 50, will offer more silks 
for 96 in cottons, in order to tempt a brisker and 
broader sale. They offer, say, 96 in silks for 96 
in cottons, and if that reduction of value of silks in 
cottons be enough for the equalization of the re- 
spective demands, the trade will go on on that basis, 
at least for a time ; and as there is now a larger dif- 
ference of relative advantage than before, there will 
be, as always in such cases, larger profits to be 
divided between the two parties. The 96 now 
offered in silks to the English is really only 60 in 
cost to the French, so that the French gain in the 
trade is largely increased ; they now get for what 
costs them 60 what would otherwise cost them 96, 
a clear gain of 60 per cent. Before the new meth- 
ods of silk culture were introduced they gained 
only 20 per cent. But the English have also gained 
largely by the ingenuity and diligence of their neigh- 
bors. Before, they gained only 20 per cent, in the 
trade at best; now they get for what costs them 
$100 that which otherwise would cost them $144, 
a clear gain of 44 per cent. Indeed, it might easily 
happen, through the changes in international de- 
mand, that even a larger share of the benefit of 
the French improvements should accrue to the 



ON FOEEIGN TEADE. 421 

English than to the French themselves ; the share of 
the French all the while being large, and much lar- 
ger, than if, greedily endeavoring to keep all the ben- 
efit, they refused to trade at all. Thus we reach 
again, from another outlook, a grand doctrine of 
exchange, that each party is benefited by the prog- 
ress and prosperity of the other. The only way in 
which all nations can share in the benefits of the 
thrift and enterprise of each other, is through mutual 
international exchanges ; and when each nation sees 
to it that it has a few commodities at least for which 
there is a strong demand among foreigners, and in 
the production of which themselves have a strong 
superiority, it may rest assured that it buys all it 
buys from abroad, gold included, at the cheapest rate 
to itself, and shares a part of the prosperity of every 
nation with which it trades. 

It is now time to look at the cost of carriage, thus 
far allowed to sink out of sight for the sake of greater 
simplicity of view. This is an important element in 
international exchanges, and one which must not be 
neglected, although Mr. Carey unduly enlarges upon 
it with a view to prejudice a free exchange. Cer- 
tainly, it costs something to carry any goods abroad, 
and to bring back a return, and we may be assured 
that if such return goods could be procured as cheaply 
without incurring such expense, the expense would 
never be incurred. The fact that all expenses con- 
nected with carriage are gladly borne by the mer- 
chants who carry on the trade, shows that the gains 
of the trade are so great as not only to pay freights 
and insurance, but also to leave a good margin for 
profits. Mr. Carey does not get around this stubborn 



422 ELEMENTS OF POLITICAL ECONOMY. 

fact. What use is it to pile up calculations to show 
that the expenses incurred in carriage, if applied to 
production at home, would secure as good goods and 
more of them? If they would, why do they not? 
Have not men common sense ? Is not self interest a 
tolerably strong motive-power? Is it needful to in- 
voke the mighty arm of law to compel men to act in 
accordance with their pecuniary interests ? Mr. 
Carey would restrict foreign trade, because it costfl 
so much to carry it on. Is that wise, in case the gain? 
after all largely overbalance the cost ? If they did 
not overbalance it, would the trade go forward? If 
the cost be large, as it is, that is a good reason to 
desire its reduction, if possible; to labor for increased 
facilities of transportation, for cheaper freights, and 
better rates of insurance; but to argue for forcibly 
stopping a trade by legal enactment, because it costs 
those so much w^ho freely undertake to carry it on, 
does not strike me, and, I believe, will not strike my 
readers, as a sound argument. 

Which nation, a party in foreign trade, pays the 
costs of carriage? Or does each pay them in equal 
proportion ? The aggregate cost of transportation to 
the foreign market is so much added to the cost of pro- 
duction, and is a deduction of so much from what 
would otherwise be the whole gain of the exchange; 
but it is not true that each party necessarily pays the 
whole of his own freights, and therefore, that the party 
carrying bulky articles is at a disadvantage compared 
with the other. He may or may not be at a disad- 
vantage. That will depend on the effect of the new 
expense, however divided, on the demand in the 
respective countries. Suppose, that in the outset 



ON FOEEIGN TEADE. 423 

England pays the whole cost of carrying cottons to 
France, and France the whole cost of sending the 
silks to England; but as cottons are many times 
more bulky than silks proj3ortionably to value, a 
larger bill of freights would fall to England ; and 
cottons would therefore fall relatively to silks ; but 
cottons and silks both have risen absolutely, that is, 
with refe/'ence to a given effort, or with reference 
to a money standard. Suppose that France, in- 
stead of 8U for 96, now has to give 82 for 96, and 
England, instead of 100 for 120 now has to give 
105 for 120. The French gain in the trade is re- 
duced by cost of carriage from 20 per cent, to nearly 
18, and the English gain from 20 per cent, to nearly 
14 : but it is by no means certain that the trade 
would go on on these terms ; the enhanced price of 
silks might well deaden the demand for them in 
England, more than the relatively less enhanced 
price of cottons in France would affect the demand 
for them. Silks have risen in England 5 per cent., 
but cottons have risen in France only 2} per cent. ; 
it is therefore every way likely that thereafter the 
demand for cottons will be stronger than the de- 
mand for silks, and if so, the French will have to 
offer better terms, or, what is the same thing, be 
obliged to pay a part of the English freights ; so 
that there is nothing in the true state of the case 
to justify the conclusion jumped at by some people 
that they who carry heavy goods are at a disad- 
vantage compared with those who carry light goods. 
That will depend on the equation of international 
demand. Nothing in the nature of things hinders, 
that each party shall in effect pay the freights of 



424 ELEMENTS OF POLITICAL ECONOMY. 

the other, or one even really pay the freights of 
both. 

These, then, are the essential principles of foreign 
trade, brought out, it is hoped, as clearly and con- 
secutively as the relative and complicated nature 
of the transactions will allow ; and in the light of 
these principles it is very clear that foreign trade is 
just as legitimate as domestic trade ; that it rests on 
the same ultimate principles in the constitution of 
man and in the providential arrangements of Nature ; 
that the profit of it is mutual to both parties, or it 
would never come into being, or, coming into being, 
would cease of itself; that to prohibit it, or restrict 
it, otherwise than in the interest of morals, health, or 
revenue, must find a justification, if at all, outside the 
pale of Political Economy ; that to say to any body 
of men who wish to render purely commercial ser- 
vices to foreigners, to receive back similar services in 
return, that such services shall neither be rendered 
nor received, is not only to destroy a certain gain, 
but also to interfere with a natural and inalienable 
right. 

Unfortunately, the old mercantile system, which 
was so wise as to believe that gold and silver were 
the only objects of real value, taught also, in coinci- 
dence with its fundamental belief, that foreign trade 
ought to be so regulated and restricted as to bring 
in the largest possible quantity of the precious met- 
als ; that each nation ought to sell much and buy 
little in order to grow rich ; that bounties ought to be 
given to exporters to encourage them to sell, and 
prohibitions laid upon importers to prevent their buy- 
ing; and that the introduction, through exchange 



ON FOREIGN TRADE. 425 

with foreigners, of articles which might be produced 
at home, should be by all means prevented by law, 
no matter what advantages for producing them for- 
eigners might have, or what advantages the nation 
itself might have in producing that which the foreign- 
ers would be glad to take in exchange. The mer- 
cantile system as such, is long ago dead and buried, 
but it has left one of its progeny behind it, of no 
better birth than its parent, which has not yet found 
its predestined death and burial. This is the doc- 
trine that goes under the name of " Protection to 
Domestic Industry," a designation, however, very 
little indicative of its real nature. This so-called 
*•' Protection " has been sought through a system of 
duties or taxes laid upon the introduction of certain 
goods from foreign countries, with a view of thereby 
raising the price of the corresponding goods of do- 
mestic production. This doctrine, clearly an out- 
growth of the mercantile system, is now something 
more than two hundred years old, and is everywhere 
in its decrepitude. An incurable wound was in- 
flicted on it by the publication of Adam Smith's 
"Wealth of Nations" in 1776; the centennial of 
that event and of American Independence will prob- 
ably witness very little practical vitality in it any- 
where in the world ; it has died out utterly in Great 
Britain, where it once had a vigorous life; it colors 
scarcely at all the revenue systems of the German 
and Austrian empires; it still lingers feebly in Rus- 
sia; it has had a recent temporary revivification in 
France; and though steadily and rapidly declining 
in the United States, it has been strong enough here 
to control the national legislation of the past decade. 



426 ELEMENTS OF POLITICAL ECONOMY. 

It has been reinforced of late years by the writings 
of Mr. Carey and Mr. Greeley; and the prevalence 
of the doctrine in the popular mind, particularly in 
New England, is still such that I deem it useful to 
examine it at some length, to confute the arguments 
urged in its behalf, to urge some decisive objections 
against it, and to answer the objections raised to the 
opposite doctrine of a free commerce. 

As Protection is supposed to be secured through 
an instrument called a tariff, let us first see precisely 
what a tariff is. The origin of the word will throw 
light upon the thing. The southernmost point of 
the Peninsula of Spain, which juts down into the 
narrowest part of the Straits of Gibraltar, holds a 
town named Tarifa. Here, during the Moorish 
domination, a castle was built, and all vessels pass- 
ing through the Straits were stopped and compelled 
to pay duties at fixed rates : whence the word tariff 
in English and other languages. It will be per- 
ceived at a glance that a tariff is only another name 
for a tax. It is the special form of tax which gov- 
erninents levy on goods brought in from other 
countries. It may be legitimately imposed for the 
sake of a revenue to support government; it may 
be a species of robbery, or black-mail, as in the his- 
torical instance just cited ; or it may be levied for the 
sake.of Protection, so called; but for whatever pur- 
pose imposed, it is always and simply a tax on the 
exchange of goods. How anybody can intelligently 
suppose that a system of taxes can be so cunningly 
adjusted as to become a positive productive agent, a 
spur to the progress of society, they must explain 
who suppose so. I myself once supposed so ; but it 



ON FOREIGN TRADE. 427 

was when I was in ignorance of the real nature and 
operation of such taxes, A careful study of the 
principles of this science, with a noting of the records 
of experience in this matter, has convinced me, as it 
has thousands of others, that Protective duties, so 
called, are nothing in the world but burdensome 
taxes laid upon industry ; that they always have 
been, and always will be, deeply detrimental to the 
true interests of society. The word " Protective," as 
applied to a tariff, is full of deception. A tariff in 
its very nature is restrictive, obstructive, prohibi- 
tive. 

The first main distinction to which I call atten- 
tion, is that between a protective tariff and a rev- 
enue tariff. Upon this point a great confusion 
exists in the common mind. A revenue tariff is a 
schedule of taxes levied on imported goods with an 
eye to equitable taxation only. If such taxes are to 
be productive, they must not interfere essentially 
with the bringing in of the goods, that is to say, they 
must be levied at a low rate, so as not much to dis- 
courage importations, or encourage smuggling at all. 
Also, experience has shown- that it is not needful, in 
order to derive a large revenue, to lay even low rates 
upon all goods imported, but only on certain classes 
of them, so as to burden at as few points as possible 
the ongoing of international exchanges. The pros- 
perity induced by commercial freedom enables a 
country to import vast quantities of the articles sub- 
jected to the tax, so that large revenues come from 
low rates levied at few points. Also, these taxes 
ought to be laid on articles, if possible wholly, at 
any rate mainly, procured from abroad and which 



428 ELEMENTS OF POLITICAL ECONOMY. 

are not produced also at home; otherwise, the in- 
cidence of the tax on the portion imported will raise 
the price also of the portion produced at home, and 
the people will pay more in consequence of the tax, 
than the government gets in revenue. A proper 
revenue tariff, then, lays low duties on comparatively 
few articles, which are wholly or mainly procured 
from abroad. The most advanced nations of Europe 
now lay their tariff-taxes in accordance with these 
three principles. 

But the purpose of a protective tariff" is totally dis- 
tinct from this. A protective tariff is a schedule of 
taxes levied on imported goods with a design to raise 
ike price of certain home comtnodities. To reach 
this end, the duties are laid by preference on goods 
which are both imported and also produced at home, 
thus violating one of the fundamental principles of 
a revenue tariff. Also, to be protective, the duties 
must either be so high as to exclude the foreign 
goods altogether, and thus give the domestic manu- 
facturer the complete monopoly of the home market, 
which is the perfection of Protection, or at least high 
enough to raise the price of the foreign goods to the 
point at which the home manufacturer is desirous of 
selling his own. These high duties, certainly for a 
time, discourage importations, and thus violate an- 
other of the fundamental principles of a revenue 
tariff. But the effect on revenue is not the worst 
effect. The main effect designed, and that actually 
follows, is to raise the price to all consumers, in order 
that a factitious advantage may accrue to certain 
home manufacturers. When most successful, the 
effect is to transfer money from the pockets of the 



ON FOREIGN TRADE. 429 

many to the pockets of a few. I do not stop at this 
point to demonstrate the economical folly of this, 
my object being now to show the idea that always 
underlies protective duties. Also, since if one home 
producer receives an artificial advantage under the 
tariff, many others may lay an equal claim to it, 
tariff-taxes for Protection come to be levied upon a 
great many articles, thus violating the third funda- 
mental principle of a revenue tariff, by interfering 
with exchanges at many points instead of a few. 

Now, can these two systems of revenue and pro- 
tection, which are so distinct and apparently incom- 
patible, be combined together ? Can there be a 
revenue tariff with incidental protection? I answer, 
No ; because Protection fully carried out would an- 
nihilate all revenue from foreign goods the like of 
which could possibly be produced at home, since 
such goods would then be all prohibited ; and, on 
the other hand, a system looking only to revenue, 
making the people pay only what the government 
is to get, would have, for a reason already given, no 
particle of Protection in it. If this be so, is there 
any reason to suppose that less degrees of protec- 
tion would not be only less hostile to revenue? 
Is it not of necessity, looking at the nature of the 
two systems, that the point at which protection 
begins is also the point at which revenue begins 
to diminish ? It is not denied that a tariff with 
protective features in it may be made to yield 
much revenue ; but can it do this without making 
the people pay much more than the revenue ? It is 
the interest of revenue that government shall get all 
that the people are made to pay in consequence of a 



430 ELEMENTS OF POLITICAL ECONOMY. 

tariff- tax. It is the interest of protection that the 
people shall pay much more in consequence of a 
tariff-tax than the government gets. Revenue is 
only received on the foreign goods that come in. 
Protection is only secured as the foreign goods are 
kept out ; or are so raised in price as also to raise 
in price the corresponding domestic goods; which 
last makes the people pay more, while the Treasury 
receives less. Therefore the conclusion is unavoid- 
able, that a revenue tariff with incidental protection 
is, if not a contradiction in terms, an attempted 
combination of things incompatible with each other. 
If Protection be good, it is good in and of itself; if 
it be bad, it has no business to be begging to lean 
on something so respectable as revenue. 

The fundamental reason why low duties on im- 
ports produce a larger aggregate revenue than high 
duties is found in the condition of society, which is 
like a pyramid standing on its broadest base, each 
of whose horizontal sections is more extended than 
the one above it. Those persons able to purchase 
an article at five dollars are more than twice as nu- 
merous as those able to purchase it at ten dollars; 
and those able to buy it at one dollar are probably 
ten times as many as those who would buy it at five 
dollars. An official list of taxable incomes in the 
Tenth District of Massachusetts lies before me, and 
selecting one town at random, I find one income 
over $40,000, three over $30,000, seven over $20,000, 
nine over $10,000, thirteen over $5,000, twenty-nine 
over 2,000, and seventy-eight over $1,000. A lower 
duty, therefore, on any article is likely to bring it 
within the reach of a wider circle of consumers ; and 



ON FOEEIGN TEADE. 431 

for many to pay a low duty is better for the revenue 
than for a few to pay a high duty. Of course the 
exact limitations must be found out by experience. 
Alexander Hamilton long ago, in one of the papers 
of the Federalist, called attention to the fact that 
high duties will not make large revenues, any more 
than a large multiplier will make a large product. 
The multiplicand is an important factor in both cases. 
A subordinate reason why low duties are favorable 
to revenue is, that they destroy smuggling. 

Free Trade is the opposite of Protection so called^ 
and not of Customs duties properly levied for revenue. 
All taxes are paid out of the gains oF exchanges; 
and there is no objection, on principle, to interna- 
tional exchanges paying their share of the taxes. 
Provided it be economical for the government to 
collect, and equitable for the people to pay, taxes 
in this form, it is just as legitimate to tax foreign 
as domestic exchanges. The considerations that go 
to determine the best methods of taxation will be 
given fully in the chapter under that title; but the 
question between Free Trade and Protection is very 
distinct from the question between Customs' Duties 
and Internal Taxation. Some free-traders think it 
would be wise to aholish custom-houses altogether 
and tax domestic exchanges only ; other free-traders 
see no objection in tariff-taxes levied at low rates on 
a few articles of general consumption wholly or 
mainly procured from abroad; but that point, in 
whichever way decided, has little or nothing to do 
with the distinctive question of Free Trade. The 
words are indeed open to a charge of ambiguity, but 
the animated debates of a century have sufficiently 



432 ELEMENTS OF POLITICAL ECONOMY. 

settled their meaning. Free Trade is the opposite; 
of Protection, and is completely realized in any 
country whenever every tariff-tax is laid solely for 
the sake of the revenue to be derived from it. From 
their natm*e and purpose, protective tariff-taxes pre- 
vent revenue; and, therefore, taxes levied with a 
single eye to revenue leave no opening for protec- 
tion. When used in its legitimate sense the word 
" protection " is an honest and needful word ; when 
used in reference to tariff-taxes it is full of deceit, 
and, being a good word, is made to cover up an evil 
thing. Protection is a rise of price on domestic g-oods 
caused by the imposition of tariff-taxes on correspond- 
ing' foreign goods. 

Since Political Economy is the science of ex- 
changes, and since protection is an obstacle thrown 
by legislation across the pathway of exchanges, po- 
litical economists generally have been much averse 
to protection, and have endeavored to vindicate the 
freedom of exchanges. Indeed, it is difficult to see 
how there can be any science of exchanges, if any 
sound economical reason can be given for hindering 
exchanges. If there be exchanges injurious to 
morals, health, or revenue, they may, of course, be 
prohibited on those grounds. Objections, neverthe- 
less, are still urged against the freedom of exchanges, 
as if, men could not yet be trusted to buy and sell 
for their own advantage. I shall now answer the 
principal of these objections. Some of them are 
popular, and will be subjected to a popular refuta- 
tion ; while such as profess to be scientific will be 
met, it is hoped, by a scientific method at least 
equal to their own. 



ON FOREIGN TEADE. 433 

1. One of the most common of these objections 
has been, that Free Trade is a theory. Men say, 
" It is all very well in theory, but it will not work 
Well in practice." Can there be a good theory that 
works ill in practice ? That is necessarily a bad 
theory that does not work well in practice ; and the 
only way to tell whether a theory is good or bad is 
to test it by practice. Everything that is done at 
all, unless by mere chance, is done on some under- 
lying theory; and it is certainly better that things 
should be done on a good theory than on a bad one. 
To concede the theory to be good is to concede the 
whole matter, since a theory is good for no other 
reason than that it is good in practice. There have 
been so many unfounded theories broached on all 
subjects, that the term has fallen into some reproach, 
and it is for this reason that the charge of being a 
theory is brought against Free Trade, but there is 
nothing in the world more respectable than a good 
theory proved by solid arguments and verified by 
facts. Newton's theory of gravitation^ for example, 
is a very respectable theory. So, and for the same 
reasons, is the theory of Free Trade, which simply 
postulates, that two parties wishing to exchange ser- 
vices for their mutual benefit should be allowed to 
do so, provided no other men's rights are infringed 
thereby. Free Trade does not compel anybody to 
trade, it merely allows those to trade who think it 
for their advantage. The only theory in the prem- 
ises is, that men are their own best judges in the 
matter of their own exchanges, and that govern- 
ments have not the right and still less the wisdom 
to restrict this advantageous interchange. 

28 



434 ELEMENTS OF POLITICAL ECONOMY. 

The theory of Protection, on the other hand, be- 
sides being complicated, is contrary to the natural 
impulses of men, denies the fundamental fact on 
which Political Economy is based, namely, that ex- 
changes are mutually beneficial, assumes that some- 
body else rather than the parties concerned are best 
judges of their advantage, bears so obvious an as- 
pect of greed on the part of those who get the pro- 
tective duties put on, and has invariably caused 
such dissatisfaction and loss in every country that 
has put it into practice, that I have no hesitation in 
calling Protection a very bad theory with nothing 
good about it. The burden of proof, at any rate, 
lies upon the man who brings in a theory interrupt- 
ing the play of natural laws. Let him bring for- 
ward and prove his theory of restriction. Let us 
hear the arguments and see the grounds that justify 
the prohibition of an advantageous trade. If the 
benefits of the trade were not considerable and re- 
ciprocal, it would not exist ; when, then, such a 
trade is going forward, who is he that takes upon 
him to curtail and prohibit it? Who is he that 
thinks himself competent to manipulate the natural 
laws of trade ? 

It is conceded by everybody that a free exchange 
of commodities within the same country is highly 
beneficial: what makes it suddenly cease to be bene- 
ficial as between foreign countries? Does the mu- 
tual benefit of an exchange depend upon the accident 
that the parties to it 37-e citizens or subjects of the 
same government? The south end of Vermont 
trades freely and advantageously with its neighbors 
across the line in Massachusetts ; is there any good 



ON FOEEIGN TKADE. 435 

reason why the poyfth end of Vermont should not 
, trade just as fr.^ely and advantageously with its 
neighbors across the line in Canada ? These are 
questions whic^ the theory of protection, in my 
opinion, cannot satisfactorily answer. 

(2.) A second objection has been, that foreign 
goods admitted freely tend to diminish the wages of 
our own laborers. Let us see if this is so. For- 
eign articles are certainly wrought by foreign labor ; 
do we, then, by buying them employ foreign labor, 
to the prejudice of our own laborers? We are 
obliged to pay for everything we buy, — are we 
not? In what do we pay? Clearly, in the pro- 
ducts of our own labor. We employ our own la- 
borers to produce the articles which we exchange 
for foreign articles. We pay for our imports by our 
exports. Our exports are created by home labor, 
and the only possible way for us to obtain the 
results of foreign toil, is to offer in exchange the 
results of domestic toil. A commercial nation, there- 
fore, not only does not, but it cannot employ foreign 
labor. The more it buys of foreigners, the more 
home labor it must employ to create the articles 
with which it pays for what it buys. We must 
remember that the exports, taking the years together, 
must and do balance the imports. Free Trade, 
therefore, can by no possibility discourage home 
labor, or diminish the wages of laborers; and, as a 
matter of fact, labor is best rewarded, other things 
being equal, in the freest commercial countries. 

I deem it important thoroughly to demolish this 
objection, for it has been considered the stronghold 
of the advocates of Protection. I admit that a pro- 



436 ELEMENTS OF POLITICAL ECOxMOMY. 

tective tariff may stimulate a certain branch of man- 
ufacture, may concentrate capital in it, may call 
laborers into it, and even for a time increase the 
wages of those laborers. But competition will very 
speedily reduce wages in that department to the 
average level in other departments, and unless it 
can be shown that restriction increases the general 
wages-fund of a country, — that fund that is de- 
signed for the payment of labor, — it is in vain to 
claim that it can increase the general wages of labor. 
Capital and laborers may indeed be withdrawn from 
one employment to another by artificial stimulus, 
but is there any general gain in that ? While the 
one is stimulated, is not the other depressed ? I 
have seen upon the ocean the wind blow up a wave, 
but I always noticed a depression behind it. The 
general level of the ocean is not raised, however 
high the waves rise. 

The tendency of Free Trade is directly the reverse 
of that alleged in the objection ; because the varied 
objects of use and elegance offered to our desires by 
international commerce stimulate labor to create that 
with which to buy them. Just so far as tariff-taxes 
keep foreign products out, they deprive domestic 
products of their best market, and thus discourage 
domestic labor. How can the free interchange of 
commodities lessen the demand for labor, or the re- 
wards of labor, while it opens the whole world for 
the sale of the products of labor? Is not a world 
market better than a one country market? Domes- 
tic products are never sent abroad to buy foreign 
products except when the foreign products thus pur- 
chased are worth more at home than the domestic 



ON FOREIGN TEADE. 437 

products are which purchased them ; and it would 
be an odd encouragement of domestic labor to pro- 
hibit its products from going where they can obtain 
the most in return. As a matter of sound reason, it 
may be said, that every foreign purchase necessitates 
the employment of domestic labor to create that 
with which the purchase is made, thereby enlarging 
the demand for laborers, and tending to increase 
their wages ; while as a matter of actual experience, 
it may be said, that a general rise of wages never 
failed to accompany the adoption of a free commer- 
cial policy by a nation whose trade was previously 
restricted. English wages have gone up on the 
whole average more than one quarter, and in some 
departments fully one half, since the adoption of 
Free Trade by Great Britain. 

(3.) A third objection against Free Trade has 
been, that many great men have believed in, and 
many great nations have acted on, the doctrine of 
Protection. The name of Daniel Webster has been 
often mentioned in this connection. To estimate 
the force of this objection rightly, two things must 
be remembered : first, that the doctrine of protec- 
tion is an inheritance from more than two centuries 
ago, an outgrowth from a confessedly false dogma, 
which, being then universally received and acted on 
by the nations, has given this, one of its corollaries, 
whatever validity custom and prescription can give ; 
and, secondly, that there has always been a rich and 
influential class of men in the commercial countries 
who have supposed that their interests were subserved 
by the practical application of the doctrine. In respect 
to Daniel Webster, the first great speeches which he 



438 ELEMENTS OF POLITICAL ECONOMY. 

made in Congress, speeches that foreshadowed his 
great fame, were delivered in 1814. These indicate, 
as any one may read in Benton's Debates, Vol. V., a 
strong hostility to commercial restrictions of all kinds. 
He opposed, and New England with him, the protect- 
ive tariff of 1816, His speech of 1824, in opposi- 
tion to the higher rates proposed in the tariff of that 
year, is in reality one of the best free-trade argu- 
ments ever made. If he left, four years afterwards, 
this high ground of truth and principle, to occupy 
the lower ground of what he deemed expedient, it 
was owing to political stress of weather, to a change 
of policy on the part of Mr. Calhoun and other south- 
ern statesmen, to a supposed necessity of fostering 
manufactures on which New England under facti- 
tious inducements had embarked on a large scale. 
Mr. Webster never justified restriction as a principle; 
his commercial instincts were too strong for that; he 
always attempted to justify his course by peculiar 
and factitious circumstances ; almost half of his 
congressional life had passed away, before he could 
be brought to vote for levying high duties ; and al- 
though he afterwards brought forward, in defence of 
the position thus assumed, arguments which Politi- 
cal Economy pronounces unsound, and although 
there doubtless mingled in with his motives a desire 
to i^ratify powerful constituents and friends who 
were directly interested in high duties, there is abun- 
dant reason to believe that his defection from sound 
principles was never so radical as has been com- 
monly supposed. 

The true answer to this objection is, that many 
more great men have believed in, and many more 



ON FOREIGN TRADE. 439 

g-reat nations have acted on, the doctrine of Free 
Trade. Antiquity knew nothing of Protection. 
Neither did the Middle Ages. England, which was 
the first nation to develop it, was the first also to 
abandon it, acknowledging, through every organ of 
her public opinion, that she had maintained it from 
the first at a constant loss to herself as well as to 
the rest of the world. The United States, late to 
adopt, has only maintained it in the midst of an un- 
yielding opposition, which has been able always to 
modify, and sometimes to reverse, the national pol- 
icy. The most enlightened public opinion in all the 
world is hostile to Protection. Nearly all of the great 
economists of the past century have denounced it. 
It still lingers on, partly because some of the argu- 
ments for it are superficially plausible, but mainly 
because many enterprising and prosperous men have 
considered it as essential to their pecuniary inter- 
ests ; and when such men demand a champion, 
eloquence and arguments are never long wanting. 
As a matter of fact, the legislation of the world 
has been largely controlled by such men, and that, 
too, not always in the interest of the masses. It 
is more than doubtful whether manufacturers as a 
whole class have ever been permanently benefited 
by protective duties, or rather, it is certain that 
they have not been ; but they have supposed that 
they were, and some of them have been, prodig- 
iously benefited ; and they have acted, and are act- 
ing, on that supposition, and the power of such 
men over public opinion is very considerable. As a 
class, they are intelligent and rich, and can easily 
combine to influence opinion and legislation. But 



440 ELEMENTS OF POLITICAL ECONOMY. 

even if they were benefited, as a whole, by protective 
duties, what sort of justice is it to take money out 
of my pocket and put it into theirs ? I object to that. 
My mickle, and your mickle, and our neighbor's 
mickle will make a very pretty muckle, — a small 
tax on all consumers of protected goods will reach a 
very handsome sum ; but what valid claim can the 
manufacturers lay to it? They are a very deserving 
class, and consequently prosperous ; but it may be 
respectfully submitted that they do not need unequal 
legislation in their behalf. They are not a needy gen- 
eration, but are well to do. The list of incomes on 
which a United States tax was paid, late annually 
published throughout the country, puts this fact be- 
yond the shadow of question. In most sections of 
New England, they are the only men of large in- 
comes. Now, it is no objection to these excellent 
men that they are rich, and getting richer; they are 
rather deserving of all honor for their enterprise and 
vigor and success ; but it is conclusive on this point, 
that they no longer need, even if they ever needed, 
any special protection from the government. Let 
them stand on the same level of advantage with 
other men, let them enjoy no unequal privileges, and 
everybody will rejoice in their prosperity. At pres- 
ent they occupy a false position, fatal to their own 
genuine self-respect, and to the hearty congratula- 
tions of their fellow-citizens. By far the larger part 
of the industrial interests of the country have no 
special protection at the hands of government ; fifty- 
two per cent, of all our population are employed in 
agriculture, whose interests, as we shall see, cannot 
be furthered by the protection to which it is com- 



ON FOEEIGN TRADE. 441 

pelled to pay tribute ; and of the whole twenty-two 
per cent, employed in manufactures, a large part are 
engaged in branches that have never been protected. 
Is it possible that the able men who own the mills 
and foundries are willing to acknowledge that they 
are the only citizens unable to render valuable ser- 
vices to society without an artificial prop at their 
back ? 

(4.) This brings us to a fourth objection, namely, 
Ihat, were it not for protective duties, other nations 
' would take all our manufacturing away from us. 
The first thing to be said about this is, that we 
do not manufacture for the sake of manufactur- 
ing, but for the sake of the product, — it is not 
the process that we care about, but the product; 
and even if it could be shown, as it cannot, that free 
trade would lessen the manufacturing, that would 
not be so deplorable, provided we obtained by it for 
the satisfaction of our wants as many or more man- 
ufactured products. Satisfactions, and not efforts, 
are ultimate in the field of exchange. In the second 
place, it is needful to look at the meaning of the 
word, manufactures. So far, I have used it in the 
loose popular way by which it has come to mean 
practically in this country the processes by which 
cotton, wool, and iron, are rendered available for 
various human uses. These more prominent inter- 
ests are currently meant under the terms manufac- 
tures and manufacturers ; but of course the terras 
properly include a wide range of efforts beyond these, 
indeed almost all forms of industry not agricultural, 
and not primarily mental. Now to say, in the broad 
sense, that protective duties are necessary in order 



442 ELEMENTS OF POLITICAL ECONOMY. 

that manufactures may succeed, is to make a state- 
ment which can be shown to be false. The only 
magic of a protective duty is to raise the price of 
certain domestic goods, either by keeping out the 
foreign goods on which the tariff-taxes are laid, or 
by raising the price of them by means of the taxes 
so that the domestic goods may sell for the same. 
It is an attempt to lessen natural competition by 
means of legislation. If the first effect follows, and 
the foreign goods are kept out, people console them- 
selves by thinking, if foreigners are not allowed to 
bring those goods, somebody will make them at 
home for us. But this is only half of it. Those 
branches of manufacture, or of agriculture, as the 
case may be, which were furnishing the goods 
wherewith to pay for those commodities about to be 
Imported but now prohibited, lose their market. If 
we will not buy, of course we cannot sell. If we 
prohibit importations, we thereby necessarily prevent 
exportations ; that is to say, we take away their mar- 
ket from those who manufacture or grow the goods 
which would be exported. We depress a profitable 
branch of manufacture by taking away its market, 
for the sake of introducing or fostering a branch 
which is by supposition and confession unprofitable. 
The advocates of protection do not claim that branches 
of business which would otherwise be profitable and 
self-supporting should be protected, but only the weak 
and less profitable kinds ; and so to bolster up these, 
protective duties virtually destroy other branches of 
industry, which only ask that their natural market 
shall be let alone, to maintain an independent and 
profitable existence. It is impossible to characterize 



ON FOREIGN TRADE. 448 

ill terms of respect so short-sighted and miserable a 
policy. How can a free commerce depress manu- 
factures, when every nation must manufacture or 
grow a dollar's worth at home for every dollar's worth 
imported from abroad ? How can high duties foster 
manufactures as a whole, when their very first effect 
is to cut off from their market all those manufac- 
tures which would otherwise have gone abroad with 
a profit, and their second effect merely to stimulate 
up to the general level of profit those which it is 
claimed will not otherwise yield a profit? 

If the second general effect follows, and the for- 
eign goods still come in though enhanced in price 
by the tax, and the corresponding domestic goods 
are in consequence enhanced in price because the 
foreign having paid the tax can no longer undersell 
them, then all consumers of both goods pay an ar- 
tificial and unnecessary price, and manufacturers 
themselves cannot long avoid paying this price on 
some things. If they could get their own product 
protected alone, that would be one thing, — a very 
unjust thing, certainly, but profitable to them, — but 
under a protective system many things must be pro- 
tected, and manufacturers have a need to pray to 
be delivered from the fruits of their own device. 
Some of them soon become sufferers under the sys- 
tem. So it is in this country now. Manufactures 
are burdened by the unnatural prices of many of 
their materials. It is as the friends and not the 
enemies of manufactures that we demand the abro- 
gation of restrictive duties; for manufactures can 
never reach their point of just expansion and proper 
strength, until this really repressing system shall be 



444 ELEMENTS OF POLITICAL ECONOMY. 

abolished. It was the manufacturers of England 
who contributed to inaugurate free trade in that 
country, and they have found it profitable ; the 
French manufacturers were afraid that if the bar- 
riers of restriction were thrown down, as proposed in 
the Cobden- Chevalier treaty of 1860, their business 
would suffer from English competition, but the re- 
sult showed how futile were their fears ; and some 
of the most penetrating and prosperous of our own 
manufacturers are now demanding industrial free- 
dom for themselves and for others. 

(5.) A fifth objection allied to the last has been 
much urged by Mr. Carej', namely, that, without 
protection, our country ivill have no diversity of em- 
ployments, and loill be confined to agriculture. But 
the truth is, diversity of employments is rooted in 
human nature, and in the circumstances amid which 
God has placed men, and so far is it from law being 
necessary to foster this diversity, that law is pow- 
erless to prevent it! While we were colonies of 
Great Britain, the laws were very strict against 
domestic manufacturing of almost all kinds, and 
yet long before the Revolution, the various branches 
of manufacture were introduced and prosecuted in 
spite of the laws: clothiers' mills went up along 
the mountain streams ; wool and woollens were 
exported ; in 1721 " New England had already six 
furnaces and nineteen forges. The product of iron 
was still more active in Pennsylvania, whence a 
supply was furnished to the other colonies." ^ The 
manvifacture of steel was also attempted. Parliament 
felt itself called on to pass laws again and again pro- 
hibiting under severe penalties these incipient manu- 

1 Ilildreth's United States, voL ii. p. 297. 



ON FOREIGN TRADE. 445 

factures, sometimes making them liable to summary 
destruction as "nuisances." As soon as a branch 
of industry becomes profitable, and suitable to the 
conditions in which a community is placed, nothing 
but extreme vigilance can prevent its springing into 
being. Men naturally, spontaneously, under the 
pressure of necessity render to each other such ser- 
vices as are in demand, and as are possible to be 
rendered in the state in which they are placed. Fos- 
ter manufactures artificially ? They will come in 
naturally and inevitably just so fast and so far as 
they ought to come in. They are as natural to men 
as agriculture. They require capital indeed, and on 
a large scale, a large capital. So does agriculture 
Capital is the growth of time and of frugality. No 
new society can come at once into all the forms of 
industry which adorn an old established State ; there 
must be a gradual growth of capital and of skill, and 
as these increase, one branch of industry after another 
comes in, and finds a stable foothold ; and as capital 
further increases, and the rate per cent, of capital 
goes down, it becomes profitable to do many things 
which it would be sheer folly to do at an earlier 
period. When every dollar of the capital of a coun- 
try can realize a clear gain of ten per cent., is there 
any sense or reason in withdrawing a part of it into 
occupations which can only yield six per cent. ? 
" But we must have diversity," says Mr. Carey. 
Certainly, we want diversity, but only a natural 
diversity, in which each branch can stand on its ov/n 
legs, and not find it necessary to tax all its neighbors 
in order that its own profits may equal the average 
of theirs. The theory of a protective tariff is this : 



446 ELEMENTS OF POLITICAL ECONOMY. 

that certain unprofitable branches of business shall 
be cared for by the State, that is to say, the citizens 
shall be taxed to bring up the profits of these to the 
general standard of profits. Is a diversity, thus 
secured, a profitable diversity ? Would it not be 
better for all concerned not to enter at present upon 
forms of industry that by confession do not pay? 
" But," urges the advocate of protection, " if they do 
not now pay, they will pay by-and-by." How do 
you know that they will? The fact that they do 
not now pay, is not of itself good proof that they ever 
will ; and at any rate, it strikes a good many people 
that it would be better to wait till that time comes, 
and to enter upon branches of industry just as fast 
as they become profitable, and no faster. 

It seems strange to me, that Mr. Carey, whose 
general confidence in man and in nature is so justly 
strong, should find his confidence desert him just at 
this point ; should show so much impatience with a 
natural progress of diversity and association ; and 
should vehemently invoke the assistance of law to 
help on diversity within a sphere for whose general 
freedom he is a distinguished champion. He is less 
consistent than the famous ch9,rioteer, who, when his 
horses ran away dqwn the hill, trusted in Providence 
until the breeching broke, and then gave all up for 
lost. Mr. Carey trusts in Providence, and does well ; 
but all at once, when to other passengers as clear- 
sighted as himself there are no signs of anything 
giving way, he shrieks out that the breeching is 
breaking. Providence is inadequate, we must have 
recourse to Protection. 



ON FOREIGN TEADE. 447 

The idea that the United States, with a greater 
variety and abundance of natural resources than any 
other country on the globe ; with an industrious, and 
enterprising, and skilful people ; with mountain 
streams which leap to the wheels of industry with a 
song ; with forests and coal-fields, and mines ; with 
marts and markets, and navigable lakes and rivers; 
with a genius for traffic, and a keen eye to profit, — 
the idea that the United States is to be reduced to a 
mere farming country, unless government can be 
coaxed to tax foreigners and citizens in behalf of 
some branches of manufacture which are asserted to 
be otherwise unprofitable, — is too ridiculous for 
serious refutation. Why, no nation of the earth has 
such facilities for manufacturing: the raw materials 
are here ; the food is here in abounding measure ; the 
instruments are here in water, wood, and coal ; cat- 
tle and horses and pastures are here ; everything is 
here which a nation can ask for with which to pro- 
duce either directly that which is wanted, or directly 
that with which to purchase at the cheapest rates 
what is wanted from abroad; and if God shall give 
us grace to mind our own business, to avoid entan- 
gling alliances and wars, to get and keep a sound 
money, and to rise above the silly jealousies which 
have hitherto restricted trade, we shall yet be the 
beehive of the nations, the chosen home of the indus- 
trial and civilizing arts. 

(6.) Mr. Carey finds an objection to Free Trade 
in the success of the policy of Colbert, the famous 
finance minister of Louis XIV. Colbert certainly 
did much for the prosperity of France, and well 
deserves the fame which posterity is so ready to 



448 ELEMENTS OF POLITICAL ECONOMY. 

accord. But to refer the immense industrial im- 
pulse which France received at that time in any 
considerable degree to the restrictive duties laid 
by Colbert on foreign trade, is an instance, by no 
means single in Mr. Carey's books, of a fallacy 
called by the logicians post hoc ergo propter hoc. It 
is most unsatisfactory and illogical to be told that 
one thing came after another and therefore . was 
caused by it. Colbert did many things much better 
worth the doing than to lay prohibitory duties. He 
swept away, so far as lay in his power, all the obsta- 
cles to the freest interchange of commodities within 
the realm of France. He abolished the interminable 
internal tolls and duties. He simplified and reduced 
the taxes. Says Henri Martin, — " We are struck 
with admiration to see Colbert begin by reducing an 
impost thirty-three per cent., on the increased product 
of which he founded in great part his hopes. Tram- 
pling on the routine of the exchequer, he had com- 
prehended that consumption increases in equal or 
even greater proportion to the abasement of duties 
that weigh on consumable objects, and that the pub- 
lic treasury does not lose what the well-being of the 
people gains." ^ He abolished superfluous offices, and 
introduced economy, and, as far as possible, honesty 
into every department of the State. He emancipated 
the Communes from their old burdens, and forbade 
their incurring new debts. He renovated the whole 
industrial and financial system; and France began 
mightily to prosper. But he was also in part, un- 
fortunately, a disciple of the mercantile system. He 
laid heavy duties on foreign goods, which of course. 

1 History of France. 



ON FOEEIGN TRADE. 449 

provoked foreigners to lay similar duties on the prod- 
ucts of French industry. Martin himself, with whom 
Colbert is a hero, acknowledges this consequence. 
Il has never been proved, and never can be, that the 
liigh duties contributed to the then prosperity of the 
French ; the weight of bare authority is about evenly 
balanced on the question ; but he who follows reason 
and science in the premises will not hesitate in his 
(iecision. 

(7.) A seventh objection much urged against a 
free commerce has been, that other nations have a 
more abundant capital^ and consequently lower rates 
of interest and profits^ than ive have, and therefore a 
restrictive tariff becomes needful. It is fair to pre- 
sume that they who say so know that foreign trade 
depends only very remotely on the absolute cost of 
the articles exchanged. If they do not know this, 
they are ignorant of the one fundamental proposition 
of commerce, and their reasonings as a matter of 
course cannot reach correct conclusions. If familiar 
with this proposition, they should see that any refer- 
ence either to lower interest of money or to lower 
wages is, in this connection, entirely irrelevant. It 
is a matter of indifference to us what the goods we 
buy from abroad cost their producers, whether they 
paid high wages or low wages, high interest or low 
interest ; we do not care about the absolute cost of 
production of anything we buy ; the question of inter- 
est for us is how much of the home commodity must 
vre give for it, and what does the home commodity 
cost us. The simple question that determines foreign 
trade is this, — would the commodity, if produced here, 
cost more than that commodity with which we buy 



450 ELEMENTS OF POLITICAL ECONOMY. 

it ? If it would, then we profitably import it ; and 
this, without any reference to its cost to the foreign 
producer. Whether he pays high wages or low 
wages, high interest or low interest, whether capital 
is abundant there or ecarce, has little to do with this 
question of a profitable exchange of commodities, 
and justifies, in no conceivable manner, the restrict' 
ive system. California has much higher wages and 
a much higher interest than New England ; does she 
need, therefore, to prohibit New-England ships from 
entering the Golden Gate ? Is it for her interest to 
put restrictions on New-England goods ? Does New 
England, because wages are lower here, get more than 
her share of advantage in the California trade ? If 
not, no more would England or India in a trade with 
us. We trade with all the world : some parts have 
a higher rate of wages and interest than we ; some 
parts have a lower rate ; so far as that matter is con- 
cerned our trade may be equally advantageous with 
them all. 

To this law of foreign trade there is, however, 
a single not unimportant exception. When two 
nations go into the market of the world virith the 
same commodity, to buy gold and silver, then the 
absolute money-cost of that commodity is, as 
between the two, an important question. That one 
of the two nations whose wages are lower, and 
whose rate of interest is less, in the manufacture of 
the common commodity will, in a trade for gold, 
under-sell the other — that is, can afford to give more 
of its commodity for an ounce of gold, because its 
commodity has cost less in gold. This is clear, and 
it is the only case where foreign trade is determined 



ON FOREIGN TEADE. 451 

by the absolute cost of production. But our object- 
ors get no crumb of comfort here ; for in the first place, 
the commerce of the world is not a commerce for 
gold and silver, but a commerce of commodities, in the 
exchange of which relative cost is the only principle. 
And in the second place, when two nations go into 
tlie market of the world for gold, they rarely carry 
the same commodity, but carry, each its own pecu- 
liar commodities, in the production of which it has 
the greatest advantage. They have a strong motive 
to do this always, for that which they have the 
greatest advantage in producing will buy all other 
commodities, gold included, at the cheapest rate. 
Here too the relative cost decides. And in the third 
place, if two nations do carry the same commodity 
into the same market to buy the same gold, and the 
nation whose wages and profits are higher is thereby 
at a disadvantage in the trade, how is a restrictive 
tariff at home to help that matter? The true remedy 
is to cultivate our own peculiar advantages to the 
highest point, and carry those commodities abroad 
to buy our gold, and not endeavor to compete with 
our neighbor in the same commodity. High wages 
and high profits are a vast national advantage ; re- 
strictive systems tend certainly to reduce them ; but 
shall we throw away a great advantage enjoyed by 
all laborers and all capital in all departments, in order 
to corripete with less fortunate nations in a single 
trade with a single commodity ? The folly of this is 
patent ; especially as the United States is a gold- 
producing country, and not only supplies herself with 
gold, but half the world besides. The United States 
produced in the twenty years from 1848 to 1868, 



4-52 ELEMENTS OF POLITICAL ECONOMY. 

$1,255,000,000 of the precious metals.^ Besides, is 
it not a little strange to hear the doctrine seriously 
propounded that we are put at a disadvantage in 
foreign trade, and that restrictions are made neces- 
sary, because on the whole we are making so much 
money ? If the current rate of interest and profits 
is so high with us, it shows that we are doing well 
on every hundred invested! One would suppose 
that capitalists might be content with such high 
profits ! At any rate, one would think that the dis- 
advantage in trade would rest with those who get 
the less returns on their investments, rather than 
with those who get the larger returns I 

Skill in manufacturing is most likely to be de- 
veloped in any country under the freest competition, 
under circumstances which make everything depend 
on relative skill, rather than under circumstances 
which make very little depend on it; and capital is 
most likely to be acquired, other things being equal, 
in that country in which each man enjoys the right 
of selling his product in the best market wherever that 
market is to be found. The sharp spur of emula- 
tion, added to the keen impulse of interest, carries 
skill to its highest point, and the opportunity to buy 
in the cheapest market and sell in the dearest, carries 
capital to its highest point, and a restrictive tariff" is 
only, an impediment to both. Skill and capital will 
create commodities, either those directly wanted, or 
those indirectly wanted with which to buy the 
others. If these others can really be obtained by us 
at a less expense of effort through exchange than 
directly, is there a decent reason why we should 
prefer to get them by a harder when an easier way 

1 J. Eoss Browne's Eeport, 1868. 



ON FOREIGN TRADE. 453 

is open? We shall not get them without being 
obliged to pay for them, and to pay for them will 
require a full expenditure of effort and skill. If for- 
eigners have the advantage over us in some things 
we have the advantage over them in many things ; 
and all exchange and all the profits of it depend on 
relative superiority at different points. 

(8.) An eighth objection to free trade has been 
plausibly and pertinaciously urged, namely, that each 
nation ought to be independent of others in all the 
more essential articles of life; and therefore protec- 
tive duties ought to be laid in order to compel the 
nations to make or grow all articles of prime neces- 
sity for themselves. The objection divides itself 
into two parts, the postulate and the inference, 
and it shall be considered in that order and rela- 
tion. First, every nation ought to be independent 
of others in respect to the supply of its more 
necessary wants, such as food, clothing, means 
of defence and ofience, and so on. But what is it 
to be independent? I suppose it means, in this 
connection, to be sure of getting what is wanted 
under all contingencies. But is an individual man 
to be regarded as "dependent," and as likely to 
lose his bread, unless he devote himself to the grow- 
ing of food directly? If he only has wherewithal 
to buy food, I take it that he is just as " independ- 
ent," just as likely to get it, as if he produced it 
himself; and so a nation which has products to 
offer which are in demand in the world without, is 
very sure of getting whatever it wants, provided it 
is anywhere to be bought, and is, in my apprehen- 
sion of it, in a very "independent" position. Pro- 



454 ELEMENTS OF POLITICAL ECONOMY. 

tectionists have degraded language and degraded 
exchange by trying to make it appear that a man 
and a nation are reduced to conditions of depen- 
dence whenever they find it for their interest to buy ; 
but the truth is that there is nothing dependent in 
buying and selling; the parties stand on a footing 
of perfect equality towards each other ; each is at 
the same moment buyer and seller; one is as inde- 
pendent as the other, and nobody can be more so 
than either, except the savage and the hermit, who 
live in a state of isolation. Moreover, every nation 
does of course devote itself directly to the supply of 
its principal wants, and always continues to do so, 
unless it appears that it can supply those wants 
more cheaply through exchange. If it can supply 
them more cheaply through exchange, it becomes, 
in my judgment, more " independent " by doing so ; 
more independent of irksome effort, and more sure 
of getting its wants supplied, since now it draws its 
supplies from a wider surface, from any point in the 
wide world where such supplies are to be had and 
where its own products are in demand. So far as 
food is concerned, this objection sounds but poorly 
in the mouths of protectionists, who are the men 
perpetually bemoaning the prospect that every na- 
tion, unless it follow their advice and lay protective 
duties, will be exclusively agricultural. 

But the inference is even less defensible than the 
postulate. Let it be admitted, for argument's sake, 
that to buy is to be dependent, and that every nation 
loses a part of its independence by every act of for- 
eign exchange by which it obtains its necessary 
supplies ; does it follovi' that protective duties are 



ON FOREIGN TRADE. 455 

the true remedy ? No. Prohibition is the barrier to 
hold up before the waning independence of the na- 
tion. Why allow a thing to go forward under more 
onerous conditions, which under less onerous was 
proving fatal to independence ? If for the citizens 
to import freely be so disadvantageous to their inde- 
pendence, how disastrous must it be to have the 
importations still go forward under a tax in addi- 
tion, which the citizens must pay! 

(9.) The last objection to a free commerce that 
will be noticed here is, that the higher paid labor of 
this country makes it impossible for us to trade freely 
with those nations in which a lower rate of wages 
prevails. This objection has been more than once 
impliedly answered in these pages ; but it requires, 
and can be given, a specific refutation. There is a 
subtle but complete fallacy in it. It is one of the 
many fallacies that have their lurking-place around 
the word "ivages." It is admitted that the rate of 
wages rules higher in this country than in European 
countries, and all good citizens, I believe, lejoice that 
the reward of laborers is high here, and desire it to 
become higher rather than lower in the time to come. 
But a high rate of wages does not necessarily im- 
port a high cost of labor. This was demonstrated at 
length in our chapter on Cost of Production. The 
cost of labor to the capitalist is made up of three 
elements : first, the nominal rate of wages ; second, 
the efficiency of the labor ; and third, the dearness 
of the commodity in which the laborer is paid. It 
would seem to be a patent fallacy to confound one 
component with a resultant of three components ; 
and yet our present objector invariably proceeds in 



456 ELEMENTS OF POLITICAL ECONOMY. 

.his discussions as if a high rate of, wages means a 
high cost of labor. He uses the former terra as if it 
were synonymous with the latter. The arguments 
proceed, and the conclusions are reached, on the as- 
sumption that the cost of labor is higher in this 
country than in Europe, while all that is asserted in 
the premise, and all that is true, is, that the nominal 
rate of wages is higher. The logical force of the pro- 
cess and the security of the conclusion are destroyed 
the moment it is perceived that rate of wages and 
cost of labor are two very distinct things. It is for- 
tunate for the United States that the two things are 
distinct ; for while the rate of general wages is higher 
here than in Europe, the cost of general labor is lower 
here than in Europe. The unmixed evils of a de- 
bauched currency are perhaps disguising this truth 
at the present moment, but it is a truth nevertheless 
that cannot be questioned when the light of the fol- 
lowing considerations is cast upon it. (1.) The cost 
of labor must be lower in this country than in Eu- 
rope because the rate per cent, of capital is higher. 
Labor and capital alone conspire in production. 
Profits are the leavings of the cost of labor. If, there- 
fore, on every hundred invested the rate of profit is 
higher, the conclusion is unavoidable that the cost 
of labor is lower. (2.) To account for this lower 
cost of labor, we have [a] The fact of the greater 
efficiency of labor. The greater the efficiency of 
labor, other elements as before, the less its cost to 
the employer. Labor is more efficient here, because 
the motives to labor are stronger and higher, because 
the general tone of things is more energetic, and be- 
cause labor, all departments being considered, is more 



ON FOREIGN TRADE. 457 

generally armed with labor-saving appliances. We 
have {b) The usually cheaper cost of that in which 
labor is paid. Abroad the laborer is paid in gold 
and silver. Here he is usually paid in a depreciated 
currency. Besides this, the price of general com- 
modities even on a gold standard is usually higher 
here than abroad. Therefore the cost of even gold 
to pay his men is less to the employer here. We 
have (c) The fact that fewer persons are employed, in 
establishments that do equal woik, here than there. 
There there are more supernumeraries, more persons 
more or less pensioned by the establishment, more 
gradations in authority, more wages of superintend- 
ence. Here, the fewest possible number of persons 
is employed, there is comparatively little superin- 
tendence, and each person is put upon his or her full 
power of work. We have {d) The fact that our 
laborers are usually temperate, and are ready to 
begin their work on Monday morning; while most 
of the common laborers, in Great Britain certainly, 
are more or less intemperate, and come late and en- 
feebled to their work from their Sunday's debauch. 
Besides these considerations, the excess in nominal 
wages paid is not so great as is commonly supposed, 
allowance being made for the different currencies. A 
skilled artisan in England earns eight shillings ster- 
ling per day, that is, two dollars in gold. Our own 
skilled artisans earn not much more. " The English 
agricultural laborer who earns fifty cents or two shil- 
lings sterling per day, earns say three pounds per 
month, and pays about this sum for the annual rent 
of his cottage. Now the laborer in this country sel- 
dom pays his annual rent by a month's wages." ^ 

1 Sidney Hciier. 



458 ELEMENTS OF POLITICAL ECONOBIY. 

Our Bureau of Statistics gives the wages of 14 
classes of operatives in woollen mills in England, 
and the corresponding wages here reduced to gold. 
Our average is only 21.89 per cent, higher than theirs. 
The figures of our last census scatter a good 
many illusions, and among others the illusion that 
wages are the great element in the cost of manu- 
facturing. They are, in fact, 19.40 per cent, of the 
value of the product in the manufacturing, mechan- 
ical, mining, and fishing industries of the United 
iStates. The value of the malerials used is 57.19 
per cent, of the value of the product. The remain- 
ing 23.41 per cent, of value of product is due to 
buildings, machinery, profit, and so on. Wages in 
the cotton and woollen industries taken alone con- 
stitute still less an element of cost than the average 
in all the similar industries given above, 19.40 per 
cent. If we call wages in round numbers 20 per 
cent, of the value of the product, and if American 
wages in woollens are 20 per cent, higher than Eng- 
lish wages in woollens, then England's advantage 
over us in woollen wages, conceding to her laborers 
equal efficiency, is only 20 per cent, of 20 per cent., 
or 4 per cent, of the whole value. So throughout. 
The advantage that Great Britain has over us in 
free materials outweighs manyfold any possible ad- 
vantage she can have in lower- priced labor.. Mate- 
rials are an element nearly three times larger in cost 
of manufacturing than wages are. Besides, low- 
priced labor is apt to be very poor labor. It is 
one of our grand advantages that our labor is not 
pauper-labor, but the opposite of it. Low- wages 
countries are idways afraid of the competition of 



ON FOREIGN TRADE. 459 

high-wages countries, and justly so. It is the com- 
petition of England that is most feared on the 
Continent of Europe, though English wages are 
the highest in Europe. With our still higher wages 
we have wrested many an industrial triumph from 
England herself; and if we had as good a money 
and as free a commerce as she has, our competition 
would be more feared by her than that of any other 
country. 

I have now answered, with what success the reader 
must judge, every considerable argument that I am 
aware of as urged in this country against the policy 
of a free commerce. I have a few brief objections 
to add to the opposite doctrine of Protection. 

(1.) It is no part of the proper province of govern- 
ment to undertake to redistribute the rewards of in- 
dustry. Government has a right to take a part of 
the fruits of every man's industry for its own main- 
tenance ; but when it goes beyond this, and forcibly 
takes a portion of the fruits of one man's industry to 
reward another man's industry, it steps out of its 
true sphere. Every man has a right to all the re- 
wards of his ov/n industry, except as to that part 
which government takes in legitimate taxation. No 
government is wise enough, or ever will be, to say 
how much of the results of my labor I shall con- 
tribute to my neighbor to remunerate his labor. 
Congress has nothing to say about that. Congress 
is bound to give us both the benefit of equal laws, 
and then to leave us both to take care of ourselves. 
It is no part of the duty of Congress to see that any 
set of men whatever are making money. When, 
therefore, any branch of industry, in the exigencies 



460 ELEMENTS OF POLITICAL ECONOMY. 

of business, is depressed, for the leading men in it to 
go to Congress with their tale of woe, to induce that 
body to lay a lax for their relief on their neighbors, 
to empower them to pass round the hat in the com- 
munity, like mendicants, and compel other men to 
drop their contributions into it, is as pitiful on the 
one side as it is extra-governmental on the other. 
The American people are patient, but they have 
borne with this sort of thing about as long as they 
will bear with it. 

(2.) It is a second objection allied to the first, that 
the protective scheme is wholly a matter of finesse. 
If all interests were " protected " and " protected " 
alike, the iysue of all the distributions and redistri- 
butions would be that all would stand relatively as 
before, but worse off by the losses of the process. 
Therefore it becomes a struggle of interests ; and 
each interest, or combination of interests, endeavors 
both to get itself " protected " and that the rest 
shall not get " protected." The woollen men, for 
example, are anxious for high duties on foreign 
woollens, but are much less anxious for high duties 
on foreign wools. The wool-growers, however, do 
not see why they are not as much entitled to " pro- 
tection," that is to say, to rob the public, as the 
woollen manufacturers. It would be difficult for 
anybody to see why they are not as much entitled 
to it. Which, then, shall get the better of the Com- 
mittee of Ways and Means ? That is the question. 
It is a question of lobbies, of influence, of indirect 
or direct bribery. So of other interests. The fact 
is, that the leading interests protected have been 
obliged to yield so much to the pressure of other in- 



ON JOEEIGN TRADE. 461 

terests with equal claims to protection, that, with a 
few exceptions, no classes would be benefited so 
much by the abolition of all protection as would 
they. They have purchased the right to pluck the 
community at one point by conceding to other par- 
ties -the right to pluck them at a dozen different 
points. The woollen manufacturers, for example, 
have to pay a considerable duty on foreign wools, 
a high duty on foreign machinery, and an enor- 
mous tax for protection on every pound of iron 
they use. If now the principle of protection were 
abandoned, they would be relieved of all the con- 
tributions levied on them by others, and the public 
would be relieved of the contribution levied on it 
by them. It would be a relief all round. The 
interests of the manufacturers are coincident with 
the interests of the public. The product cheapened 
by the abolition of all these high duties, as well 
those which the manufacturers have to pay as those 
which specially protect them, would find a vastly ex- 
tended market, not at home only, but also abroad ; 
and such depressions in business as the woollen men 
are now suffering from would become rare indeed. 
Those branches of business, and they are numerous 
and important, which have never had a syllable 
of protection in the United States, have been the 
most prosperous and are now the strongest. They 
have to send no delegations to Washington. They 
expend the ingenuity and the money which protected 
interests spend in artifices, in the development of 
their business ; and they have found, what the others 
at no distant day will find, that honest industry and 
skill are better in the long run than the highest 
strategy of the lobby. 



462 ELEMENTS OF POLITICAL. ECONOMY. 

(3.) Protection is a wasteful way to reach the end 
ostensibly proposed by it. It is claimed to be need- 
ful to encourage weak branches of business. Let us 
suppose for argument's sake, what would be folly to 
concede in reality, that it is desirable for the public 
to encourage a presently unprofitable business. How 
can it most cheaply and most certainly do this ? 
Clearly enough, by offering a direct bounty on all 
that is actually produced. Let the public know 
what it gets for what it gives. Suppose the article 
wanted be hats. It is unprofitable at present to 
manufacture hats, but the public thinks it desirable 
to introduce the manufacture at the expense of the 
people. Very well. Let the government offer to 
pay outright from the public chest, say $2, for all 
hats of a certain quality made in the country. The 
bounty would be paid only so far as the manufac- 
ture was actually carried on. This stimulus would 
be explicit. All would be open and above-board. 
Everybody could see what was done, and what it 
was done for. This would be demonstrably the 
cheapest and most certain way to encourage hat- 
making. For suppose, on the other hand, the pro- 
tective method be adopted, and a duty of ^2 apiece 
be laid on foreign hats to encourage the home manu- 
facture. Every consumer now pays an extra $2 for 
his hat, but there is no assurance that anybody will 
go into hat-making. Nobody is pledged to do it. 
It will depend upon the comparative prospect of 
making money in that, or other business, whether 
that business is continued and developed under the 
duty. Suppose, however, that the home market is 
one half supplied by the home production, and one 



ON FOREIGN TKADE. 463 

half by the foreign article enhanced ^ in price by 
the duty. Suppose the market takes 2,000.000 hats. 
Then $4,000,000 are paid by consumers to encour- 
age hat-making, when $2,000,000 in bounties would 
encourage it to the same extent. Unless the duty be 
so high as to keep out the foreign article altogether, 
there is a good deal of money paid by the people for 
hats that does not encourage hat-making. The sys- 
tem is wasteful. Why then is it preferred ? It is 
preferred for the same reason that the fisherman pre- 
fers water a little muddy to fish in. The destined 
prey cannot see the operation of things so well I 
Protection is a cover under which the people are 
cheated. Is it strange, then, that the people grow 
indignant? 

(4.) Protection makes a promise at the outset 
which it rarely fulfils. Special interests ask for pro- 
tection to enable them to " start," holding out the 
promise that they will soon be able to walk off alone. 
Unluckily, the facts all show that that time, in their 
judgment, never comes. The interests which are the 
most highly protected in the United States at this 
moment, "started" in Massachusetts more than two 
centuries ago I The manufacture of linen, woollen, 
and cotton cloth was begun in Massachusetts in 
1638, in Rowley, by some families from Yorkshire; 
and became so remunerative in less than three years 
that several acts of the General Court designed to 
stimulate it were repealed.^ The manufacture of 
woollens began in Massachusetts 235 years ago, and 
yet in the year of our Lord 1873, under an avowedly- 
protective system, and after twelve years' uninter- 

1 Pairre3''s History of New England, Vol. !I. page 53. 



464 ELEMENTS OF POLITICAL ECONOMY. 

rupted experience under the high duties of this sys- 
tem, we are told constantly that ^'-this immense indus- 
trial interest is in immediate danger of being destroyed 
by foreign importations /" Do not these facts, and 
they might be multiplied indefinitely, throw a little 
discredit on the promises of protection ? " We shall 
soon be able to go aloiie." Yes: but when? The 
duty on foreign iron of all kinds is high at this 
moment, and yet we read out of an unquestionable 
authority that, in 1676, " as good iron was made as 
any in Spain " in Massachusetts, and that there were 
" six forges for the making of iron in the colony." ^ 
The absurdity of this strong point of protection is 
apparent the moment its principle is attempted to be 
applied in domestic trade. If a new Boston dry 
goods' house should set up in Franklin Street along- 
side the old established houses there, and modestly 
charge its customers fifty per cent, additional on all 
goods, so as to enable it to " start " and to " compete " 
with its neighbors, it requires no prophet to predict 
that the "run" of its trade would be in the wrong 
direction. Young men, sometimes with little capital, 
are starting every year in all branches of business, by 
the side of old firms in settled business, and they 
bucceed by dint of tact, skill, and industry. The 
United States will succeed by dint of the same, 
and .not otherwise. Let us hear no more, then, of 
this deceptive talk about " starting." Credat Judams 
Ape/la. 

(5.) Protection always gives birth to smuggling, 
and other frauds upon the revenue. Secretary 
McCulloch, in his Report for 1866, estimates these. 

1 Palfrey, Vol. III. page 299. 



ON FOREIGN TRADE. 465 

for that year at $92,000,000. The country will do 
well to ponder over this instructive official commen- 
tary on the principle of high duties. " Gentlemen," 
said Sir Robert Peel to the House of Commons in 
1.842, " what is the use of fixing our rates so high as 
to allow the smuggler to underbid us ? " Smuggling 
has always accompanied high protective duties, and 
always will. Laws and vigilance have been unable 
to prevent it. Laws and vigilance are unable to pre- 
vent it now. To evade honest taxation is a high 
evime against society. To evade laws passed, not 
for revenue, but to foster class interests at the ex- 
pense of the many, is a much less crime. It is a 
rude attempt to right a wrong. Government is the 
first and main offender. Let it yield to all men their 
just rights, including the right of free exchange sub- 
ject only to fair taxation, and it will have no occa- 
sion to harry smugglers, and spend millions of the 
people's money in useless vigilance. To levy such 
high duties as either to prevent importations or to 
encourage the smuggler is a gross mistake. The 
country loses its revenue, the honest importer his 
business, the public morality becomes corrupted, and 
the manufacturer is not ultimately protected. 

(6.) Protection defeats itself. Tariff-taxes, like 
other taxes, reappear in higher prices of commodi- 
ties. If these taxes be high, and many, as they must 
under a system of protection, nothing can hinder 
high ranges of those prices in which the tariff'-taxes 
directly or indirectly appear. The protected goods 
are raised in price, not simply by the action of the 
duties put for that purpose on corresponding foreign 
goods, but frequently also by the action of duties 



4GG ELEIVIENTS OF POLITICAL ECOiSIOMV. 

put on other foreign goods for the purpose of pro- 
tecting somebody Ase, which goods have entered in 
as materials or machinery to further domestic pro- 
duction. It is tlie high prices of these classes of 
goods that invite foreign importations. Such is a 
good market to sell in. As soon, therefore, as high 
tariff-taxes have had time to work out in high prices, 
foreigners can pay the high duties and still sell 
and undersell in such an artificial market. With 
this principle all facts agree. It accounts for the 
constant clamor for more protection. It accounts 
for this, that importations are never permanently 
stopped by high duties. Such duties make prices 
artificial, business precarious, losses inevitable, and 
" protection" self-destructive. 

(7.) Protection cannot raise the average of prices. 
It can raise the prices of some things, but in so doing 
it necessarily depresses the prices of otiter things. 
Prices in any country depend on the quantity and 
quality of the money there, relatively to the quantity 
and quality of other salable things. But protection 
has no tendency to increase the quantity of money 
there. How can restraints on a profitable commerce 
increase the quantity of money ? If therefore, under 
protection, some things are raised in price, there 
must be less money to go to other things, and thei/, 
consequently, must sink in price. If protected goods, 
and goods into which dutied goods have entered, are 
now higher than before, then non-protected goods 
must be lower than before. It is easy to see that 
this loss in price falls largely upon the exportables 
of a country. Exportables cannot be " protected." 
Their value, consequently their price, is determined 



ON FOREIGN TRADE. 467 

by the condition of the foreign, not the domestic 
market. In eft'ect, the imports constitute the market 
for the exports. If tariff-taxes lessen the imports, 
the value of exportables declines of course. If the 
natural exportables be manufactures, the protective 
duties, if at all general, will enhance the cost of 
their production, and thus be likely to exclude them 
thereafter from the foreign market. For example, 
twelve years ago the United States exported eleven 
million dollars' worth of coarse cottons ; a protec- 
tive tariff" was imposed, and this branch of export 
has nearly ceased. If the natural exportables be 
agricultural products, as is largely the case with us, 
the loss in price consequent upon protection falls 
heavily upon the farmers. What they have to buy 
is enhanced in price by the tariff", and what they 
have to sell is depressed in price by the tariff". What 
reason would thus expect, the price-lists actually 
show. As manufactured products have risen in 
price, so raw produce has declined in price, under 
our successive protective tariff's.^ Not augmenta- 
tion, but an unjust distribution, is the art of protec- 
tion. Free Trade alone can maximize the utilities 
and values of the world. 

(8.) Protection is to be condemned when judged 
of by its own fruits. According to the census of 
1870, there were in the United States one hundred 
and thirty-five fewer establishments making cottons, 
those remaining worked up 25,000,000 pounds less 
of raw cotton, and the gold value of the product 
was but little more in 1870 than in 1860. Woollen 
manufactures have been for several years in an un- 
satisfactory condition. Even the coal, iron, and steel 

1 See Colonel Grosvenor"s Does Protection Protect 1 p. 264. 



4:68 ELEMENTS OF POLITICAL ECONOMY. 

trades, except the making of pig-iron, are feverish 
and unsettled. Ship-building, which had nearly 
ceased, seems ju«t now to be reviving a little, in 
spite of a restrictive tariff" and a depreciated money. 
Natural conditions are better than artificial condi- 
tions, and freedom is more wholesome and profit- 
able than restraint, in this whole field of exchanges. 

It is always pleasant to be able to confirm one's 
reasonings with facts, to clench the nail driven home 
by a logical process, with a blow or two from the 
hammer of actual experience. It is fortunately pos- 
sible to do this in regari to free trade. The Greeks 
and Romans, though the latter at times stopped the 
exportation of specie, never dreamed of putting ob- 
stacles in the path of ordinary traffic. At Athens, all 
exports and imports were subject to a duty of two per 
centum. In the ports of her subject allies, Athens 
laid a duty of five per centum, in lieu of tribute. 
When, in a few exceptional cases, she laid ten per 
centum, it was denounced as downright extortion. 
The ports of Rome and Italy sometimes enjoyed a 
perfectly free trade; but generally, in them, and in 
the ports of the provinces, a revenue tax of five per 
centum was levied under the Republic, and two and 
a half per centum under the Empire. 

England in the year 1842 abandoned for substance 
the -doctrine of protection, and seven years later 
abolished a main feature of the system in the 
discrimination till then maintained in favor of her 
own ships over those of foreigners in her own ports. 
There is nothing now to hinder American ships 
from competing on equal terms with English ves- 
sels in the coastwise carrying-trade of England 



ON FOEEIGN TUADE. 469 

itself. The English tariffs are adjusted with a view 
to revenue merely; and in the late special commer- 
cial treaties with France, the English have persuaded 
the French to lower their own duties more than they 
would otherwise have been inclined to do. England 
claims, through the mouth of her responsible min- 
isters and statesmen, to set before the nations an 
honest example of free trade; and invites them, as I 
believe, in good faith, to follow her in the path which 
she has opened up for herself. The force of this ex- 
ample is frequently sought to be parried by alleging 
that England reached through protection a point of 
prosperity at which she was well able to dispense 
with protection. This is neither ingenuous nor true; 
since the men who have persuaded the English gov- 
ernment to abandon the principle of protection, are 
the men who have demonstrated the economical 
folly of the, principle under all circumstances; and 
have shown that England maintained the policy so 
long at a loss to herself as well as her neighbors. 
Other nations can say, if they please, " We will 
maintain protection as long as England did, and 
then follow her example in giving it up." But if 
they do this, they will do it at a loss, as England 
did, and too late bemoan their folly, as England 
does. Said Mr. Gladstone, Chancellor of the Eng- 
lish Exchequer, in 1856, — " There is one domestic 
feature which I wish it were in our power effectually 
to exhibit to the governments and inhabitants of for 
eign countries. They know by statistics, which are 
open to the world, the immense extension which our 
commerce has attained under and by virtue of free- 
dom of trade, and the great advancement that has hap- 



470 ELEMENTS OF POLITICAL ECONOMY. 

pUy been achieved in the condition of the people; but 
they do not know what it has cost us to achieve this 
beneficial, nay, blessed change; what time, what 
struggles, what interruptions to the general work of 
legislation ; what animosities and divisions among 
the great classes which make up the nation ; what 
shocks to our established mode of conducting the 
government of the country ; what fears and risk, at 
some periods, of public convulsion. These were the 
fine and 'penalty we 'paid for long adherence to foll'y. 
We paid this fine and penalty upon returning to the 
path of wisdom, which too late we wished we had 
never left. It is not easy to calculate its amount, 
but if it could be exactly reckoned, and fully ex- 
posed to the eyes of other nations, our juniors in 
trade, it might supply them with a timely warning 
against imitating our former errors, and with the 
best encouragement to the adoption, before they 
become entangled in the creation of artificial inter- 
ests, of our recent and better example." 

But it is said, as if that were sufficient to con- 
demn Iree trade, that England adopted it out of 
pure self-interest. Of course she did ; and other na- 
tions will also adopt it from the same motive. No 
other motive is appropriate in the premises. The 
idea, disseminated by protectionists, that it requires 
a millennium for free trade to work in, is wholly falla- 
i3ious ; it requires an enlightened self-interest, and 
nothing more ; and it is one of the grand wonders 
of Providence, that the elements of society are so 
wisely prearranged, that, within the sphere of ex- 
change, the welfare of all is promoted through the 
enlightened self-interest of each. Trade is always self- 



ON FOREIGN TRADE. 471 

ish, just as much so under freedom as under protec- 
tion; it is a sphere all whose operations are subject to 
the legitimate control of conscience, but it is not, and 
never was designed to be, a sphere of sympathy and 
benevolence: these have a sphere of their own, above 
and beyond the sphere of exchange. When a man 
gives, let him give, and enjoy the luxury of doing 
good ; when a man buys and sells, let him honestly, 
but with an eye to self-interest only, buy and sell 
and get gain. 

The number of tariff-taxes in England in 1842 
was 1150; in 1873 it is only 17. The customs 
revenue has kept very steady under the successive 
remissions of these taxes, and is about the same now 
as then, namely, £20,500,000. Of these 17 articles 
taxed, 5 yield over 95 per cent, of the revenue, and 
2 more most of the rest, showing that a large rev- 
enue may come from few articles of exclusively for- 
eign production, as sugar, tea, coffee, tobacco, wines, 
fruits, and liquors. Under, this remission of tariff- 
taxes and repeal of the navigation laws, the exports 
and imports of Great Britain, which in 1842 were 
but little in excess of their average of the previous 
forty years, have now increased threefold; British 
tonnage entered with cargo more than threefold; 
foreign tonnage, fourfold; shipbuilding, threefold; 
exports per capita between 1854 and 1868, from 
£3 IO5. 2d. to £6 Os. *dd.\ imports per capita in 
same interval, from £5 IO5. 2d. to <£9 2s. Qd. ; ex- 
ports of cotton, nearly threefold; of linen, fourfold, 
of iron and steel, fivefold ; of leather, sixfold ; of 
haberdashery, nearly sevenfold ; of woollen yarn, 
eightfold ; of woollen manufactures, fourfold ; of 



472 ELEMENTS OF POLITICAL ECONOMY. 

machinery, tenfold. Wages have increased at least 
25 per cent, in all skilled employments, while hours 
of labor have been abridged and staple articles of 
food reduced in price. Paupers have decreased from 
1 in 11 per capita to 1 in 20.^ 

The year 1860 is memorable in the history of Eng- 
land for the negotiation and ratification of the French 
Commercial Treaty, and also as the year in which 
the remaining duties, avowedly of a protective char- 
acter, were repealed. The results to France of the 
relaxation of her own duties are only less brilliant 
than those to England, as she has less fully em- 
braced the system of freedom. Comparing 1860 
with 1868, the volume of French commerce increased 
from 5,804,800,000 francs to 7,979,100,000 francs; 
French exports to England from 331,775,000 to 
847,200,000 francs ; the export of butter to England 
from 2,500,000 to 52,000,000 francs ; of eggs, from 
7,000,000 to 38,000,000 francs ; the whole export of 
wines from 800,000 to 4,000,000 gallons; the whole 
manufacture of silks, woollens, and cottons, from 
92,800,000 to 265,139,000 francs. French manufac- 
turers were afraid of the competition of England, 
which they professed to be unable to withstand. 
The result has shown, however, that, in the eight 
years, France has sent to England four francs iu 
manrufactures to one franc received from England in 
manufactures. The explanation of this is partly 
due to the fact that the French have learned better 
than any other people the money value of elegance. 
They have learned that Beauty is a source of Wealth, 
and so they not only adorn their capital, and have 

1 Librarian Board of Trade, Charles Kniylit's England, et aL 



ON FOREIGN TRADE. 473 

made it by far the finest city in Europe, attractive 
as a resort to all the world, but also they contrive to 
make all their handiwork beautiful, and thus control 
in many things the markets, as they do also the 
fashions of the world. ^ 

The Zoll-Verein, or Revenue-Union of the Ger- 
man States, presents a splendid example of the pros- 
perity which follows in the train of free exchange. 
The rate of imposts on foreign goods is varied from 
time to time by the Zoll-Verein Congress, but ten 
per cent, is the maximum, and the interests of the 
revenue are consulted in adjusting the rates below 
that: since 1851 the raw materials coming from 
abroad are admitted free, or nearly so. The pro- 
ceeds of these duties go into a common treasury, 
and are then distributed among the various members 
of the Union on the basis of their population. 
Every member without exception now receives a 
larger revenue than it did before it joined the Zoll- 
Verein. The city of Hamburg, a chief distributing 
point for the imports, is a sort of bonded warehouse 
under the system. The dutiable articles are arranged 
.in thirty-seven classes ; and the simplicity of the 
rates, the lowness of the rates, and the fewness of 
the articles charged with rates, stand in striking con- 
trast to these points in the present tariff of the United 
States. The revenue under the Zoll-Verein iu 1872 
was 40,835,009 thalers, which was 27 per cent, more 
than in 1867. Nearly 31.11 per cent, was from 
coffee, 11.66 per cent, from leaf tobacco, and 6.92 
per cent, from salt. Thus 49.69 per cent, was from 
three articles : 9 other articles yielded 26.92 per 

1 This thought was suggested to me by my late lamented friend, Sidney 
Homer, of Boston. 



474 ELEMENTS OF POLITICAL ECONOMY. 

cent. ; and 25 articles yielded 91.24 per cent, of the 
whole. Iron, steel, and their manufactures, are ad- 
mitted on easy terms, pig iron at 6 cents, and loop, 
rolled, and hammered iron, iron and steel wire, and 
cast steel, at 42 cents per cwt., but the home produc- 
tion of iron within the Zoll-Verein has increased 
steadily with the increase of the importation of for- 
eign iron ; so of other staples ; an interesting proof 
that the relatively free introduction of foreign articles 
does not depress, but rather stimulate the production 
of similar articles at home, provided there be fair 
natural advantages.^ Only 152 articles are taxed. 

Our last example shall be Belgium. The perfect 
free trade which Belgium enjoyed in the sixteenth 
century gave an impetus to her industry and to her 
commerce which placed her at that period at the 
highest pitch of commercial prosperity. From 1792 
to 1814, that country was controlled by the French, 
who applied to it the protective system with extreme 
rigidity. From 1814 to 1830, Belgium was united 
with Holland, and the two had in common a cus- 
toms' tariff based on a maximum duty of 3 per cent. 
on raw materials, and 6 per cent, on manufactured 
goods. It was during this period that the modern 
manufactures of Belgium were brought into exist- 
ence, and made that astonishing progress which was 
demonstrated by an exhibition of national industry 
in 1830. A violent revolution, based on a diflference 
in race, language, religion and traditions, then separ- 
ated the Belgians from the Dutch, and the former 
reim posed upon themselves a protective system with 

1 Zolltarif des Deutschen Zoll-Vereins. I am indebted for a copy of this 
to the kindness of our minister at Berlin, Hen. George Bancroft. 



ON FOREIGN TRADE. 475 

such results in revenue and trade and industry, that 
M. Frere Orban, then and now Minister of Finance, 
came forward in 1851, and declared his intention 
gradually to remove from the tariff every duty that 
could be called " protective." With this view, a new 
tariff went into operation in 1855 ; and another, 
actually fulfiUing that intention, in 1866 ; so that 
now, a tariff is maintained solely for revenue; and 
an almost universal public opinion finds fault with 
it, not that it is so free, but that it exists at all. The 
chambers of commerce in Belgium have unanimously 
passed resolutions advising the government to raise 
the revenue now raised by duties in some other way, 
and thus introduce a perfect free tradb.^ 

I have dwelt the longer on this question of free 
trade, because it is a practical one now in this coun- 
try, for whose right solution every citizen should be 
anxious. Some additional light will be thrown upon 
the subject in each of the three remaining chapters. 

i I-etter of M. Vander Maeren, of Brussels, April 10, 1868. M. Vander 
Maeren is a manufacturer, member of tlie govemmeat, and well known as 
writer on economic subjects. 



476 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER XIV. 

ON THE MERCANTILE SYSTEM. 

There have been three epochs in the progress of 
the science of Exchange. Each of these has been 
marked by a theory of its own, of which the two 
earlier were radically incorrect, yet prepared the way 
for the third and true system. We have already 
sufficiently considered the first of these theories, 
which assumed that gold and silver are the only 
wealth, and, consequently, that the only way for a 
nation to grow rich was to foster the importation 
and prohibit the exportation of the precious metals. 
The second commercial theory was more refined 
and complicated ; we have already spoken of it as 
the Mercantile System, and partially explained its 
fundamental prificiple. The principle was to pre- 
serve the balance of trade, to make the exports 
greater than the imports, so that the balance should 
come back in gold and silver. The whole system is 
based on the absurd supposition that a merchant 
will carry abroad goods worth at home a certain 
sum, merely that he may bring back goods and 
money worth as much. Why, on that principle, 
should he carry forth goods at all ? 

The nature of trade, as mutually advantageous, 
was not understood. After every fair mercantile 
transaction, both parties are richer than before. The 



ON THE MERCANTILE SYSTEM. 477 

more genuine exchanges there are between two 
countries the better, because the motive for an ex- 
change is always and everywhere the mutual inter- 
est of the parties. The benefit of the exchange is 
shared by both, otherwise there would be no ex- 
change. 

But the Mercantile System led each nation to 
suppose, that, by manoeuvre and finesse, it could 
obtain more than its natural share of advantage. 
England, for example, in her trade with France, 
found that, by natural tendency, she bought as much 
of French wines and silks as she sold France of 
hardware and woollens. Instead of being satisfied 
with a legitimate and mutually advantageous trade, 
the English, under the promptings of the Mercantile 
System, say, " This will never do. This will never 
do. There is no balance in our favor. We must 
sell to France more than we buy of her, or else we 
get no balance of trade." Accordingly restrictions 
are laid on some French goods. Their introduction 
is either prohibited, or heavy duties are levied on 
them, in order to lessen the quantity imported. This 
is done in the hope of selling to the French as much 
as before, but of buying less, this is, less French 
goods ; so that the difference must be paid in gold 
and silver. 

All that was mighty well ! But unfortunately the 
gold and silver, even if they should get it, was no 
whit better than the French goods, and would prob- 
ably go right back to France in the purchase of such 
goods. And unfortunately also the French were 
adepts in the Mercantile System ; they wanted a 
favorable balance too. They must sell more than 



478 ELEMENTS OF POLITICAL ECONOMY. 

they buy. Their exports must exceed their imports. 
Why not ? And accordingly they prohibit some 
species of English goods, or burden them with a 
heavy duty ; tlie English retaliate by new restric- 
tions on the products of French industry, and are 
again in turn retaliated upon. Thus they go on 
tinkering and tormenting trade in the vain hope of 
some imaginary balance I 

Because England and France are adjacent, and 
because their natural productions and acquired in- 
dustry are so very diverse, they are naturally to an 
immense extent mutual buyers and sellers. France 
is gifted, perhaps as much as any country upon 
earth, in point of soil, climate, and natural produc- 
tious. She produces with the greatest facility, and 
in the greatest abundance, wines and the cereal 
grains ; and has unusual advantages also for the 
culture of the mulberry and the manufacture of 
silk. 

England is not thus blessed by Nature ; but she 
has freedom, and industry, and energy, and skill; 
these have made her for centuries the greatest man- 
ufacturing and commercial country in the world. 
She has always had those things to sell which 
France wanted to buy, and has always wanted to 
buy those things which France has had to sell. Ex- 
changes between two such countries are natural and 
inevitable. If the governments undertake to forbid 
them, then the business will be done by smugglers, 
though with hazard and loss. 

Now, the Mercantile System disturbed and well- 
nigh destroyed this natural and profitable trade. 
To be sure England could buy her wines of France 



ON rilE MERCAKTILE SYSTEM. 479 

much cheaper and of better quality than of Portu- 
gal ; but then it was thought that the balance of 
trade with Portugal could be made more favorable 
than that with France; and accordingly, in 1703, 
the wines of Portugal were admitted upon the pay- 
ment of a duty 38J per cent, less than the duty paid 
upon French wines; and the woollen cloths of Eng- 
land, which had been prohibited in Portugal for 
twenty years, were to be admitted upon terms of 
proportionate advantage. Up to that time the light 
claret of France had been the beverage of the wine- 
drinkers of England. Thereafter the more intoxi- 
cating port became what Daniel Defoe calls "our 
general draught." It was a point of patriotism for 
the Englishman to hold firm to his port.^ An eco- 
nomic blunder was followed, as usual, by moral dis- 
advantage. Five generations of English gentry — for 
the preferential duty was not abolished till 1831 — 
paid tribute in increased drunkenness to the balance 
of trade. The habit of taking strong stimulants 
was established ; coarser tastes became the fashion j 
and even now sherry must be mixed with brandy to 
be acceptable to English palates. To drink worse 
wines at a higher price, to incur a habit which is a 
national disgrace, were not the only consequences; 
for the French, to retaliate and to restore the balance, 
prohibited English woollens. Thus the French lost 
the best market for their wines, and the English the 
best market for their woollen goods, which the French 
must now purchase elsewhere at an enhanced cost. 
It was a dead loss all round, — a gratuitous loss 
without any compensation whatever. 

1 Knight's History of England, v. 267. 



480 ELEMENTS OF POLITICAL ECONOMY. 

Some very instructive laws — instructive in their 
folly — were passed in England to foster the woollen 
trade, with an eye to an ultimate balance. A law 
of 1666 required all shrouds to be made of wool.^ 
Another law to the same effect but more stringent 
issued in 1677. This was amended three years later 
by an enactment, that all corpses, except those of 
persons dying of the plague, should be buried in 
shrouds made of pure wool, under a penalty of <£5. 
This law was repealed in 1814. 

To encourage wool involved discouragement to 
flax and cotton. A table-linen, called huckaback, 
began to be extensively made in England about 
1700. It encountered great opposition. It was held, 
that Providence had appointed the woollen manu- 
facture as the special employment of the island, and 
that the most acceptable sacrifice was that of the 
flock. Ireland might grow flax and make linen, as 
some compensation for the injustice that had been 
committed towards her in absolutely prohibiting the 
importation of her cattle. Cotton was also coming 
in. As early as 1719, printed calicoes of English 
production had become not only fashionable but 
common. Clamor alleged that the manufacture of 
light woollen stuffs would be ruined , and so an Act 
was passed in 1721, to preserve and encourage the 
woollen and silk manufactures, by prohibiting the 
use and wear of all printed, painted, stained, or dyed 
calicoes, in apparel, household stuff, or furniture. 
Of course such legislation was nugatory ; but here 
is the evidence, among many other proofs, of the 
supreme ignorance and folly of law-makers, who, 

1 18th Charles IL chap. 4. 



ON THE MERCANTILE SYSTEM. 481 

from the earliest days of the loom and the plough in 
England, have struggled to regiment all industry — 
to encourage or to prohibit — to determine what 
wages laborers should be paid, and what should be 
the profit of capitalists — to crush rising industries 
by taxation — to compel the people to eat dear food 
for the supposed benefit of the landowner — and, 
finally, to find out that the nation was never so uni- 
versally prosperous as when its industry was wholly 
left to the care of itself, under the guidance of God's 
natural laws.^ 

So far was this regulating mania carried at times 
that almost all legitimate commerce ceased between 
England and France. So reluctant was the one to 
buy of the other, so fully were the statesmen of each 
under the influence of the prejudice that the prosper- 
ity of their neighbors was incompatible with their 
own, that Parliament, in William and Mary's reign, 
decreed that the French trade was a nuisance ; and 
Adam Smith tells us that, in his time, that is, less 
than a hundred years ago, smugglers were the prin- 
cipal importers of British goods into France and of 
French goods into Britain. 

(1.) The laying extraordinary restraints on the 
importation of goods from those countries with which 
the balance was supposed to be unfavorable, was 
one device of the Mercantile System to increase the 
quantity of gold and silver in that country. It was 
unfortunately not the only nor the worst one. 

(2.) An obvious second expedient was to prohibit 
altogether, or to burden with very high duties, the in- 
troduction of all such goods as could be produced at 

1 Knight's England, v. 2G. 
31 



482. ELEMENTS OF POLITICAL ECONOMY. 

home. If we can produce the articles at home, then 
we shall not have to import them, and that will help 
the balance. Under the influence of this feeling, 
England, damp and cold, in the very teeth of Na- 
ture's protests, undertook to rival France in the 
culture of silk. Heavy restraints were laid on for- 
eign silks, and the monopoly of supplying the home 
market was given to her own manufacturers. Cer- 
tainly, silk can be made in England, of a somewhat 
inferior quality and at a somewhat greater cost than 
in sunnier climes. To overcome these disadvan- 
tages, what was needed was the healthy stimulus of 
competition. If things had been left to take their 
natural course, and foreign silks had been admitted 
freely, the home manufacturers would have been put 
upon their mettle to discover improved processes, to 
invent machinery, to make up the disadvantages of 
Nature by expedients of Art. The plant never be- 
comes hardy and strong that does not root itself 
amid the breezes of heaven; so neither does a 
branch of business grow up into self-sustaining and 
vigorous life without the stimulating breezes of 
competition. Of this the case in hand affords an 
excellent illustration. For more than a century the 
silk manufacture of England, fenced round and 
protected, as it was called, by these restrictive and 
prohibitory duties, languished, pined, and at times 
almost expired; for the simple reason that the man- 
ufacturers, instead of relying upon their own inven- 
tion, skill, and energy, looked to the government for 
support, and to an artificial monopoly ; and it would 
have remained till this day inferior in design and in 
every other good quality, had not a great statesman, 



ON THE MERCANTILE SYSTEM. 483 

Mr. Huskisson, who was denounced as " a hard- 
hearted political economist," made a partial begin- 
ning, in 1826, of that system of free trade which has 
raised this particular manufacture, as so many oth- 
ers, to an eminence which utterly disregards every 
danger of foreign competition. The duty on foreign 
thrown silk was then reduced from nearly fifteen to 
five shillings per pound ; and on raw silk from nearly 
six shillings to three pence per pound. The conse- 
quence was that then first the English silk culture 
began to thrive ; it has thriven from that day to this ; 
the duties have been successively lowered, until, in 
1860, the duties on foreign silks of every kind were 
abolished by Mr. Gladstone ; and that England, 
which was to be ruined in 1826 by the importation 
of foreign silks, has been exporting for years silk of 
native manufacture to the extent of about $10,000,- 
000 annually.^ 

As an illustration of the mischiefs which the Mer- 
cantile System everywhere introduced into the realm 
of industry, let us look at this instance a little more 
closely. During the continuance of the monopoly, 
the English consumers of silk were obliged to pay 
a very high price for an inferior article. To whose 
benefit did this high price accrue ? It was designed 
to accrue to the benefit of the home manufacturer. 
The sole object in laying the prohibitory duties 
was to prevent importations, and to leave the home 
market entire to the home manufacturer. Precisely 
at this point we see how the whole doctrine of Pro- 
tection grew out of the Mercantile System. The 
Mercantile System wished to repress importations 
for the sake of the balance of trade ; but if needful 

1 McCullocli's Dictionary, ed. 18G9; Knight, v. 21. 



484 ELEMENTS OF POLITICAL ECONOMY. 

articles cannot be imported, they must be made oi 
grown at home ; and in order to be made or grown 
at home, the makers or growers must be encouraged. 
The monopoly of the home market was precisely 
this encouragement ; and it is owing to this single 
circumstance that influential classes in every mer- 
cantile community have supposed themselves bene- 
fited by this monopoly, that the doctrine of Protec- 
tion has lingered so long in the general mind. It is 
easy, however, to see that this benefit is in most 
cases wholly imaginary; and that the high prices 
paid by the consumers do not, on the whole, 
strengthen the manufacture, as has been supposed. 
If the government had gone further, and given 
those who had already commenced the culture of 
silk the monopoly against their own countrymen as 
well as against foreigners, so that nobody could 
engage in the manufacture except those already 
engaged in it, then, indeed, these would grow rich 
at the expense of their countrymen. Government 
would take money out of the pocket of every con- 
sumer of silk, and put it into their pocket, and the 
whole benefit of the high prices would accrue to 
the manufacturers alone. But governments have 
rarely gone so far as this. They have excluded for- 
eign competition, but not prohibited home compe- 
tition ; and the result has been, that the high duties 
which excluded the foreign goods, and the conse- 
quent high prices of the domestic product, have 
drawn many men and much capital into that busi- 
ness, in the hope of an extraordinary orofit. The 
business has been artificially stimulated, and capital 
has been thrust into it which would not have gone 



ON THE MERCANTILE SYSTEM. 485 

of its own accord. The thing has been overdone ; 
and the feverish home competition, in its anxiety to 
reap monopoly prices, has brought down prices iar 
below the paying figure. The business has col- 
lapsed from its very inflation ; and thus alternate 
chills and fever have shaken the life out of it. 

But the Mercantile System, and the restrictive 
policy that sprung from it, obtained universal cur- 
rency. The statute-books of every nation in Europe 
are defaced by the absurdest laws and regulations 
respecting manufactures and commerce. Also, 
the artisans in the cities and towns were formed 
into guilds, that is, incorporated societies, and to 
each guild was given the monopoly of the market, 
in its branch, of industry. No man could practise 
the art of a shoemaker in Antwerp or London with- 
out the consent of the guild of St. Crispin ; and the 
guild itself determined the number of apprentices to 
each artisan, the years he should serve, the condi- 
tions under which he might become a master; in 
short, determined everything respecting the trade by 
constitution and bye-laws. The governments, justly 
regarding these artisans as the most industrious and 
deserving of their subjects, granted them many priv- 
ileges, which, however, were no less contrary to 
sound principles than the rest of the system. That 
they might obtain cheap provisions, the export of 
corn was forbidden ; and thus agriculture was pre- 
vented from selling its products in the best market, 
wherever that market might be found. That they 
might obtain the raw materials of their manufac- 
tures cheap, the export of these was strictly for- 
bidden. The tanner and currier, for example, must 



-186 ELEMENTS OF POLITICAL ECONOMY. 

sell his product to the "gentle Craft of Leather,'* 
and had no other market. 

The general doctrine of fostering exportation was 
infringed on in these instances, because it was 
thought that there would be a greater ultimate ex- 
port of manufactured products, if the raw materials 
of these were forbidden to be exported, and cheap 
provisions were secured to the artisans. 

In order to encourage agriculture, most Europoan 
countries, in accordance with the doctrines of the 
Mercantile System, passed corn-laws forbidding the 
importation of foreign grain, each nation wishing to 
raise its own subsistence from its own soil. The 
consequence of this was that the landholders secured 
the monopoly of supplying the home market with 
food ; which of course greatly enhanced the price to 
all consumers, especially in times of scarcity. The 
increased price of bread, which rich and poor must 
pay alike, was but a part of the evil consequences. 
No nation is so sure of its subsistence, when it en- 
deavors to raise the whole of that subsistence at 
home, as when it leaves the channels of importation 
open for foreign supplies. When the trade in corn 
is free, the dearth in one country is instantly sup- 
plied by the superabundance of another, and that 
by natural laws as beautiful and invariable in their 
operation as the laws that govern the heavenly 
bodies. Interference with natural law in no direc- 
tion is so mischievous and culpable as in this. Is H 
not plain to common sense that that nation is most 
likely to obtain its food with regularity and in plenty 
which draws its supplies from the widest surface? 
Massachusetts, for example, does not begin to feed 



ON THE MERCANTILE SYSTEM. 487 

her own population ; but does any one suppose her 
people are anymore likely to starve on that account? 
She can buy food with the products of her industry. 
Her calicoes and cassimeres, her hardware and cut- 
lery, her nick-nacks and notions, will buy wheat not 
only in the marts of the West, but in Poland and 
Russia as well. She is sure to be fed, because she 
has wherewithal to buy food ; more sure to be fed 
than if she compelled the industry of her people to 
abandon the more profitable mill-stream and factory, 
shop, and foundry, to extort from these rocky hill-sides 
the reluctant grains. 

England, too, in 1849, removed the last vestige of 
corn-laws from her statute-book, and now imports 
flour freely from the Black Sea and from the Baltic, 
from France and from the United States. Who 
supposes that, if England did not raise a kernel of 
wheat, she would not be as certain of her daily 
bread as the people of Poland or of Michigan ? 
But one may say, in case of war, she had better 
raise her food at home. But it is absurd to suppose 
that any nation would be at war with all the world 
at once ; and we may be assured that the portion 
not belligerent would be eager to furnish the sup- 
plies. And besides, plenty of wheat would enter 
England if tha English only wanted it, though all 
the navies of the world should blockade the fast- 
anchored isle. Every creek and headland would be 
alive with the silent and secret but busy agents of a 
clandestine trade. 

The simple consideration that condemns this sec- 
ond expedient of the Mercantile System, namely, 
the prohibiting the importation of such commod- 



±88 ELEMENTS OF POLITICAL ECONOMY. 

ities as can be produced at home, and the Protective 
policy inseparably connected with it, is, that it in- 
volves a dead loss to the productive powers of the 
v/orld. There is in the world a certain amount of 
capital and a certain amount of industry. These, 
if left to their own keen sense of interest, will make 
the aggregate amount of production in the world as 
great as that amount of capital and industry can 
make it. If, then, a free commerce distribute this 
aggregate production over the earth in accordance 
with the simple law of supply and demand, we shall 
have not only the greatest production, but the most 
perfect distribution. 

But if now government steps in, and withdraws 
capital and industry from their freely chosen posts 
of activity, prohibits exchanges that would otherwise 
be made, and commands commodities to be manu- 
factured or grown in localities where they would not 
naturally be manufactured or grown, then certainly 
the aggregate production of the world is lessened, 
and its distribution is less perfect. 

(3.) The Mercantile System had two other expe- 
dients which were frequently employed to subserve 
the ends of its grand principle. For the sake of 
increasing the exports, and thus improving the bal- 
ance of trade, bounties were given to encourage 
the export and sale of native fabrics in foreign 
markets. A bounty, we understand, is a sum of 
money paid outright by the government to the ex- 
porters of native fabrics, in order to enable them 
to sell their goods as cheap or cheaper than their 
rivals in the foreign market. England, for example, 
was so anxious to sell her goods to foreigners, that 



ON THE MERCANTILE SYSTEM. 489 

she regularly paid her merchants for selling the 
goods at a loss. " The price of these goods in that 
market," says the merchant, "will not reward my 
capital with the ordinary profit." " Never mind," 
says England, " sell away, and I will make up your 
loss by a bounty!" Was not that a rare and brill- 
iant way of enriching the country ? By natural 
laws, a branch of industry ceases as soon as it be- 
comes unprofitable ; but by the system of bounties 
a trade was perpetuated of which the expense was 
greater than the returns, of which every operation de- 
stroyed a portion of the capital employed in it. The 
loss was made up to the operators by government; 
in other words, the people were taxed to pay it. 

(4.) The fourth and last expedient of the Mer- 
cantile System was to help the balance of trade by 
founding colonies, that the mother country might 
enjoy the monopoly of their trade, and force them 
to resort exclusively to her markets. All the English 
colonies on this continent were bound by the rigid 
fetters of this colonial system. Up to the date of 
American Independence, Virginia and Massachu- 
setts must buy most they wished to buy in English 
markets, and carry most they had to sell to English 
ports. Spain and France extended the same co- 
lonial monopoly, with even more of inflexibility, over 
their American and West India settlements ; and it 
was considerations growing out of this colonial 
policy which gave birth to the American Revolu- 
tion ; and that war was v^aged not more for the 
interests of humanity than for the freedom of trade. 



490 ELEMENTS OF POU'riCAL ErONuMY, 



CHAPTER XV. 

ON AMERICAN TARIFFS. 

So long as the United States were colonies of 
Great Britain, their commerce was bound in the rigid 
fetters of the Mercantile System. We have already 
seen in the last chapter that colonies were one of the 
devices of the Mercantile System to secm-e a favor- 
able " balance of trade." If the maxim be to sell as 
much as possible and buy as little as possible, then 
colonies, which could be compelled to receive the 
goods of the mother country, must be commercially 
valuable. Accordingly, all the commercial countries 
of Europe, and particularly Spain and England, 
adopted a colonial policy that sprung directly from 
this fundamental maxim. They valued their colonies 
as affording broad markets for the sale of products, 
and also because they could monopolize the articles 
produced by the colonists themselves. Tn general, 
the colonists were compelled to sell all they had to 
sell" to the mother country, and to buy all they had 
to buy of the mother country ; even though the arti- 
cles thus bought were not the produce of the mother 
country, but must first be imported there and then 
exported thence to the colonies. Until the Revolu- 
tion, a Boston ship, for example, could not sail di- 
rectly to China for teas, but the teas must first be 



ON AMERICAN TARIFFS. 491 

brought to England in British ships, must pay a 
duty there, and then be reexported to the colonies. 

As early as 1650 this monopoly system was en- 
tered upon by the then republican Parliament of 
England. The colonies had already overcome the 
difficulties incident to their first settlement, had 
begun to increase rapidly in wealth, and their com- 
merce had become so considerable as to afford a. 
temptation to restrict its freedom and to endeavor 
to make it peculiarly advantageous to the mother 
country. In the year 1651, the Republican Parlia- 
ment passed the famous Act of Navigation. It had 
a double object, — to promote the interests of English 
shipping, and to strike a decisive blow at the carry- 
ing trade of the Dutch. It prohibited all nations 
from importing into England in their bottoms any 
commodity that was not the growth and manufact- 
ure of their own country. In 1660, by a memora- 
ble statute, the ordinance was reenacted, with addi- 
tional clauses, substantially excluding foreign ships 
from American harbors, and sacrificing to English 
monopoly the natural rights of the colonists. 

This Navigation Act is of great interest to Amer- 
icans, because the American Revolution grew directly 
out of it. Says Bancroft, " American Independence, 
like the great rivers of the country, had many sources; 
but the head spring which colored all the stream was 
the Navigation Act." It was enacted that certain 
enumerated articles, which included all the principal 
productions of the colonies, could not be exported 
directly to any foreign country, but must first be 
sent to Great Britain, and there unladen, before they 
could be forwarded to their final destination, it 
amounted to the same thing as prohibiting all exports 



492 ELEMENTS OF POLITICAL ECONOMY. 

except to the mother country- The chief products 
of their industry the colonists could not export to 
any place but Great Britain, not even to Ireland ; 
neither sugar, nor tobacco, nor cotton, nor wool, nor 
indigo, nor ginger, nor dye-woods, nor molasses, nor 
rice, nor peltry, nor ore, nor pitch, nor tar, nor turpen- 
tine, nor masts, nor yards, nor bowsprits, nor coffee, 
nor cocoa-nuts, nor whale-fins, nor hides, nor ashes. 

Nor was this all. England constituted herself not 
only the sole market for American products, but also 
the sole storehouse for American supplies. The 
colonies must not only sell exclusively in British 
markets, but they must also buy exclusively in Brit- 
ish markets. It was enacted, that " no commodity 
of the growth, production, or manufacture of Europe, 
shall be imported into the British plantations, but 
such as are laden and put on board in England, 
Wales, or Berwick-upon-Tweed, and in English- 
built shipping, whereof the master and three fourths 
of the crew are English." 

The preamble to this statute, which was supple- 
mental to the Navigation Act, is curious, and assigns 
as the motive of the restriction, " the maintaining a 
greater correspondence and kindness between the 
subjects at home and those in the plantations ; keep- 
ing the colonies in a firmer dependence on the 
mother country ; making them yet more beneficial 
to it in the further employment and increase of Eng- 
lish shipping and in the vent of English manufact- 
ures and commodities ; rendering the navigation to 
them more safe and cheap ; and making this kingdom 
a staple, not only of the commodities of the planta- 
tions, but also of the commodities of other countries 



ON AMERICAN TARIFFS. 493 

and places for their supply ; it being the usage of 
other nations to keep their plantation-trade exclu- 
sively to themselves." 

In close connection with these commercial restric- 
tions, it was a leading point in the colonial policy to 
discourage all attempts of the colonists to manufact- 
ure for themselves. " That the country which was 
the home of the beaver might not manufacture its 
own hats, no man in the colonies could be a hatter 
or a journeyman at that trade, unless he had served 
an apprenticeship of seven years. No hatter might 
employ more than two apprentices. No American 
hat might be sent from one plantation to another. 
America abounded in iron ores of the best quality, 
as well as in wood and coal ; slitting-mills, steel- 
furnaces, and plating-forges, to work with a tilt- 
hammer, were prohibited in the colonies as nui- 
sances." Similar restrictions existed in respect to 
wool and weaving; no wool, or any manufacture of 
it, could be carried across the line of one province to 
another ; and a British sailor, wanting clothes in a 
colonial harbor, was forbidden to buy there more 
than forty shillings' worth. The liberty of free traffic 
between the northern and southern colonies was 
grudged to the colonists; and any of the enumer- 
ated articles exported from one colony to another, 
were subjected to a duty equivalent to the duty on 
the consumption of the commodities in England. 

So fully were British statesmen trammelled by the 
ideas of this colonial system, that Lord Chatham 
himself, the best friend the colonies had in England, 
did not hesitate to say from his place in Parliament, 
that in a certain probable contingency, he would pro- 



494 ELEMENTS OF POLITICAL ECONOMY. 

hibit the colonists from manufacturing even a hob- 
nail or a horseshoe. And Lord Sheffield, at a later 
period, said, " The only use of American colonies is 
the monopoly of their consumption, and the carriage 
of their produce." 

From this degrading commercial vassalage the 
Revolution set us free. One will have observed that 
the economical consideration that condemns the co- 
lonial policy is, that it violates this sound commer- 
cial doctrine, namely, that men should buy in the 
cheapest market and sell in the dearest, wherever 
those markets are to be found. If the mother country 
finds it necessary to employ prohibitions to draw the 
colony-trade to herself, it proves that that trade, if 
left to itself, would have found other and more prof- 
itable channels. If Great Britain could have fur- 
nished us with all commodities as cheaply as we 
could procure them elsewhere, then there was no 
need of prohibitions and penalties — we should have 
gone to her of our own accord, as unerringly as the 
needle points to the pole. If she could not furnish 
us as cheaply as others, we were wronged — it was a 
tribute and a tax. She made us buy in a dearer 
market, when a cheaper one was open. 

So, if she could pay as much for our commodities 
as we could get for them elsewhere, there was no 
need of compelling us to sell to her ; we should, in 
that case, sell to her inevitably. If she would not 
give what we could get elsewhere, then we were 
wronged ; she made us sell in a cheaper market, 
when a dearer one was open. Her prohibitions then 
were either needless, or they were pernicious. 

But it may be said that our loss was her gain , 



ON AMERICAN TARIFFS. 495 

that what we paid extra as consumers, was to thera 
extra profit as manufacturers and merchants. But 
where is the justice of taxing one set of subjects or 
citizens for the benefit of another set of subjects or 
citizens ? And how is the wealth of the whole to be 
promoted by a transfer of gains from one part to 
another part? 

A deeper consideration condemns the colonial 
policy. Every country has certain advantages, 
which, if properly improved, enable that country to 
defy the competition of the world in certain branches 
of industry. If England could not sell as cheaply 
as others in the colonial ports, then she was employ- 
ing her capital and labor at home less profitably than 
she might have employed them ; for if she had em- 
ployed them upon those branches of production for 
which she had natural and acquired advantages, no 
nation could have undersold her ; and therefore, if a 
forced market in the colonies encouraged her to con- 
tinue branches of industry that would otherwise have 
been abandoned, it was a permanent loss to her own 
productive power. 

I do not believe that colonial monopolies ever 
enriched a mother country, on the whole. So perfect 
and compensating are economic laws, that the losses 
of one country can never contribute to the permanent 
gains of another. The highest commercial prosperity 
of one country implies and demands a corresponding 
prosperity in other countries. Commerce is ex- 
change. The richer your neighbors are in all prod- 
ucts, the richer you will become by your dealings 
with them. England's hereditary jealousy of the 
prosperity of France has been as economically fool- 



496 ELEMENTS OF POLITICAL ECONOMY. 

ish as it has been bitter and persistent. It is true of 
the family of Commerce, as it is of the family of 
Christ, "If one member suffer, all the members suffer 
with it." 

A good commercial system was not one of the 
immediate fruits of the American Revolution. The 
first government established in this country, the gov- 
ernment of the Confederation, which lasted from 
1781 to 1789, was not gifted by the people with the 
power " to regulate commerce." This was one of 
the reserved rights of the States, which immediately 
began to use it in accordance with their own views 
of their own interests. Each State laid its own 
tariff, and undertook to regulate its own trade. The 
results were most disastrous. Great Britain, seeing 
that, as a nation, we were helpless commercially, 
not only refused to negotiate a commercial treaty 
with us, but by an Order in Council, peremptorily 
excluded our ships from her West India possessions, 
between which and the United States there had 
grown up, partly through some relaxations in the 
Act of Navigation, and partly in violation of that 
Act, a large and most profitable trade. We were in 
no position to retaliate. As a nation, we had no 
power to exclude her ships, and thus force her to a 
position of reciprocity. The States passed various 
and conflicting laws. If Massachusetts, for example, 
laid a duty on certain goods, and Rhode Island did 
not, very little revenue would Massachusetts draw 
from that source ; the goods were imported into 
Rhode Island, and then smuggled across the border. 
Thirteen independent States regulating the com- 
merce of our seaboard, induced endless confusion, and 



ON AMERICAN TARIFFS. 497 

there was no power to remedy it. Our commerce, 
such as it was, was ruined. 

To consult upon a remedy for this state of things 
was the specific purpose of the meeting at Annapo- 
lis, in 1786. Alexander Hamilton was there as a 
delegate from New York. He persuaded the dele- 
gates to decline entering upon the subject of com- 
merce, inasmuch as it was connected with other 
great defects of the Confederation, to which their 
powers did not reach ; and drew up an Address to 
Congress to call another Convention, with ample 
powers to go over the whole ground, and to devise a 
system adequate to the exigences of the country. 

Thus was summoned the Federal Convention of 
1787, which framed the Constitution under which we 
live, and which gave to Congress, that is, the nation, 
the needful power " to regulate commerce." 

The new House of Representatives, under the 
Constitution, commenced at once to discuss and 
frame a uniform national tariff. It passed in 1789 ; 
and, with some modifications and additions passed 
in subsequent years, constituted what I shall call, for 
convenience, the Hamilton tariff. I name it so, be- 
cause Hamilton, as Secretary of the Treasury, made 
an elaborate Report to Congress on the subject, and 
the tariff, as finally adjusted, bore in almost every 
part the impress of his moulding hand. This tariff 
lasted for twenty-five years. It was very successful. 
It admitted the principle of protection, indeed, but 
mainly as subordinate to revenue, and rarely for its 
own sake, and the general rate of duties laid was 
very low. For instance, in the original bill as passed, 
cotton goods were charged 5 per cent., iron goods 

32 



498 ELEMENTS OF POLITICAL ECONOMY. 

71 per cent., and woollens 5 per cent. These du- 
ties were afterwards somewhat, but not largely, in- 
creased.i Pig iron bore no duty at all. 

Now under this low tariff the revenue steadly in- 
creased, year by year. There was almost no fluctua- 
tion, but a steady annual growth of income from 

1790 to 1808, when the Embargo was laid, which, of 
course, interrupted everything. During these eighteen 
years, the revenue gradually rose from $4,000,000 in 

1791 to over $16,000,000 in 1808 ; and, what is of 
greater consequence, the ratio of income to popula- 
tion is still more striking. The revenue began at the 
rate of about $1,000,000 to 1,000,000 of people, and 
steadily rose during the eighteen years to about 
$2,500,000 to 1,000,000 of people. 

If now we compare these eighteen years of a low 
revenue tariff with any eighteen years in our after 
history when we have had an avowedly protective 
system, we shall see that in the point of steadiness, 
and especially in the point of a steady increase, those 
eighteen years cannot be matched. They cannot 
be matched even by a comparison with the years 
1846-61, during which we had ostensibly revenue 
tariffs; because although these fifteen years present 
fewer fluctuations than any fifteen years after the 
first, they were undoubtedly less steady in increased 
revenue on account of a scale of duties too high to 
be most productive, and also on account of the in- 
crease of the free list in 1857. Still, a fair compari- 
son of those eighteen years, and these fifteen years, 
with the years intervening, and with the years subse- 
quent to 1861, will yield all that is claimed in respect 

1 Hildreth's United States. 



ON AMERICAN TARIFFS. 490 

to the superiority of low revenue over protective 
tarift's in point of a steady and increasing customs' 
income. Till 1808 duties averaged 11^-J- per cent. 

But while I praise the Hamilton tariff, in compar- 
ison with those that came after it, I do not forget 
its defects. It borrowed from the old Navigation 
Act of England, and made unwise discriminations 
between foreign bottoms and American ships. Du- 
ties were 10 per cent, higher on goods imported in 
foreign ships. Tonnage was 6 cents per ton on 
American ships ; 30 cents per ton on ships Ameri- 
can-built but owned by foreigners ; and 50 cents per 
ton on all others. These discriminations were de- 
signed to encourage the building of American ships, 
and to keep the carrying trade both coastwise and 
oceanwise to American bottoms. But it cannot be 
wise to put obstacles in the way of foreigners coming 
to our ports to trade. Neither do sound principles ap- 
prove even the moderate margin yielded in this tariff 
to protection. The duties indeed were low, — they 
were scarcely a burden upon industry, — but neither 
on the other hand did they aid it. All above the best 
revenue figure was needless. If, with the great advan- 
tage of being able to escape the costs of transporta- 
tion, together with the abundance of raw material, 
and the endless resources of agriculture, any branch 
of industry could not live without artificial help, then 
the proof is complete that it ought not to have been 
entered upon, and could not have been prosecuted, 
except at a permanent loss. 

Our second tariff, passed in 1816, I shall designate 
as the Calhoun tariff. Then first we entered upon 
the protective system as such ; and it is a curious 



500 ELEMENTS OF POLITICAL ECONOMY. 

mstance of how times change and men change with 
them, that Mr. Calhoun, who afterwards became the 
champion of Free Trade, strenuously advocated this 
tariff, while Mr. Webster as strenuously opposed it. 
Till then the tariff question formed no element in 
our politics ; if T may say so, nobody knew that we 
had any tariff unless he chanced to read the statute- 
book ; and it was an evil day for this country when 
a purely scientific question became mixed up in 
passions and politics, and adhesion, on one side or 
the other, to what not one voter in a thousand ever 
began to comprehend, was made a test of party. 
From that day to this, no tariff question has ever 
been decided on its merits. Interests, sections, 
passions, have influenced every bill ; and it is a part 
of the punishment, I believe, for prosecuting an arti- 
ficial and false system in any department, that it is 
hard work to get out of it. New England generally 
opposed the Calhoun tariff, and the principle of pro- 
tection embodied in it; so did a majority of the 
Southern members ; but South Carolina, seeing the 
growing value of cotton, and anxious for a home 
market for the raw material, united with Pennsyl- 
vania and the Middle States in securing the high 
duties, especially upon cottons and iron. The duties 
were increased, on an average, 42 per cent, above 
the old rates preceding the war. Imported articles 
were divided into three classes : 1st, Those of which 
a full domestic supply could be produced ; 2d, 
Those of which only a partial domestic supply could 
be afforded ; and 3d, Those produced at home 
very slightly, or not at all. On the first class, the 
duties were fixed substantially at 35 per cent, ad 



ON AMERICAN TAEIFI'S. 501 

valoiem. On the second class, including cottons and 
woollens, the duties were 25 per cent., to be reduced 
after three years to 20 per cent. On the third class 
the rates were mostly fixed with a view to revenue 
only. Pig iron was now taxed |9 per ton. 

In connection with the tariff", we copied again, and 
more largely, from the English Navigation Act. Im- 
portations by foreign ships were limited to the prod- 
uce of their respective countries ; and the coasting- 
trade, hitherto open to foreign vessels, was now re- 
stricted to those American owned and built. In one 
word, we entered fairly and squarely upon the career 
of restriction. Average duties 1816-24, 24i per cent. 

Our third tariff, that of 1824, we may call, if we 
please, the Clay tariff. That gentleman, though 
Speaker of the House at the time, took an earnest 
part in the debates, and was regarded as the most 
prominent advocate of what then first began to be 
called the " American System," that is, the system 
of high protective duties. Mr. Webster still opposed 
this system, made an elaborate speech in reply to 
Mr. Clay, and voted against the bill. 

The bill increased the duties on protected articles 
very considerably ; and is an excellent proof that 
interests that are petted, and legislatively protected, 
do not long remain satisfied with what they receive, 
but are soon clamorous for more protection. The 
Calhoun tariff gave these interests large protection ; 
eight years run on, and they call for more ; they get 
it. Are they satisfied ? Why should they be ? In- 
stead of being taught to rely upon themselves, they 
have been taught to lean upon the government. 
The average of duties 1824-28 was 32-^- per cent. 



502 ELEMENTS OF POLITICAL ECONOMY. 

Four years after the Clay tariff, that is in 1828, was 
f)assed the " Tariff of Abominations,'' so called, in 
the politics of the time. The manufacturers of 
course had asked for more protection ; but the oppo- 
sition to the system was now strong ; it could not 
prevent the passage of the bill, but it loaded it down 
with all manner of objectionable features, to make it 
as distasteful as possible to its advocates. A political 
design to make the protective system unpopular 
appeared, and was indeed avowed ; but the friends 
of protection, in view of the higher duties on many 
articles, came to the conclusion to support the bill 
notwithstanding its odious features. They swal- 
lowed the whole with the best grace they could. 
Daniel Webster, after strenuous but fruitless efforts 
to reduce its " abominations," for the first time in his 
life voted for a bill involving the principle of high pro- 
tective duties. In 1828-32, duties averaged 36^ per 
cent., and on dutiable goods only, 43^ per cent. 

Four years later Mr. Clay went into the Presi- 
dential canvass against General Jackson upon the 
avowed platform of protective duties. He was 
beaten. The country seemed to indicate its prefer- 
ence for another system ; and accordingly in 1833 our 
fifth tariff, called the " Compromise tariff,'* became 
a law. It adopted a sliding scale in reference to all 
duties that were over 20 per cent., providing for their 
gradual reduction on each alternate year, till 1842, 
when and thereafter the uniform rate on all these 
goods should be 20 per cent, on the home valuation. 
Mr. Clay himself brought forward this bill as a " com- 
promise ;" and it was also approved by Mr. Calhoun. 
Average duties 1833-42, 16 per cent., on dutiable 32. 



ON AMERICAN TARIFFS. 503 

During the next nine years the attention of the 
country was occupied by the great questions of a 
National Bank and the currency. On these and other 
questions the adnainistration of Van Buren became 
unpopular and broke down ; and the Whig party, 
coming into power, passed what I shall call the 
" Whig tariif " of 1842. It was a high protective 
tariff. Extravagant expectations were entertained in 
regard to it in the high political excitements of the 
time. Under it, millions of capital were seduced into 
manufactures, particularly of iron ; and when the high 
duties were abolished, as they were a few years later, 
hundreds and thousands of persons were pecuniarily 
ruined. It is impossible to speak in terms sufficiently 
deprecatory of an artificial system that inveigles 
capital and laborers into branches of industry in 
which they never would have embarked of their own 
accord. Our whole course of legislation on this sub- 
ject cannot be properly characterized in terms of 
respect. Congress has alternately inflated, and then 
punctured, the bubble. The average annual duties 
between 1842 and 1846 on the aggregate of imports 
was 22f per cent., and the average on the dutiable 
goods alone, 32| per cent. These averages are all 
carefully calculated from the official table presented 
in Mr. Commissioner Wells' Annual Keport of 1869. 

In 1846 was passed what we will call the " Walker 
tariff," from Robert J. Walker, then Secretary of the 
Treasury. It reduced the duties on imports down to 
about the standard of the " Compromise " of 1833. 
It discriminated however, as the Compromise did not, 
between goods that could be produced at home and 
those that could not. It approached, in short, more 



504 ELEMENTS OF POLITICAL ECONOMY. 

nearly than any other, in its principles and details, to 
the Hamilton tariff, although the general rate of 
duties was higher. From that time up to 1857, there 
was a regular and large increase in the amount of 
dutiable goods imported, bringing in a larger revenue 
to the government. The surplus in the treasury 
accumulated, and large sums were expended by the 
government in buying up its own bonds at a high 
premium, for the sake of emptying the treasury. 
Under these circumstances the " tariff of 1857 " was 
passed, decidedly lowering the rates of duties, and 
largely increasing the free list. The financial crisis 
of that year diminished the imports, and the reve- 
nue fell off $22,000,000. Duties on the whole im- 
ports for the fifteen years 1846-61 averaged 17| per 
cent., and on those goods subjected to duty averaged 
22| per cent. 

It only remains to speak of the " Morrill tariff" 
of 1861. I include under that designation, as pre- 
viously under the designation of the Hamilton tariff, 
the various supplements and modifications passed in 
accordance with the leading idea of the original act. 
So reckoned, the Morrill tariff is the ninth in order. 
The difficulties growing out of the war ostensibly 
united all parties in the view of obtaining, if possi- 
ble, more revenue to the government ; but there was 
no agreement as to the means by which more rev- 
enue could be obtained ; and the protectionists in 
Congress seized the opportunity of the withdraw- 
ment of the Southern members for discriminating in 
favor of the articles in v^diich they ^vere interested 
even to the extent of diminishing the revenue by 
very high duties which lessened importations. They 
did this too without any general popular call for such 



ON AMERICAN TARIFFS. 505 

a step. The people had deliberately and repeatedly 
indicated their preference for the system of low du- 
ties. The policy of the country was supposed to be 
settled in that direction. There was indeed a mildly 
drawn resolution in the political platform of the party 
that triumphed in 1860 in favor of what is called pro- 
tection ; but very little, or nothing, was said upon 
that subject in the canvass; the people pronounced 
in their verdict upon a totally different set of ques- 
tions from those involved in a protective tariff. 
When, therefore, the congressional protectionists, 
availing themselves of the absorption of the popular 
mind in the war questions, availing themselves also 
of the indignation against England on account of 
the supposed haste with which she had recognized 
the insm-gents as belligerents, sprung a highly re- 
strictive tariff upon the country, they did it in obe- 
dience to no general call, and with little reference to 
the general welfare. In view of such a war as that 
then impending, the relevant questions were, How 
can we get the most revenue with the least inter- 
ference with the industries of the people ? and, How 
can we distribute the tariff-taxes so as to burden the 
whole people as equally as possible ? If these ques- 
tions alone had influenced the representatives of the 
people, the Morrill tariff would never have been 
heard of. The instincts of a people, on the breaking 
out of a great war, are always favorable to commer- 
cial freedom. On the 6th of April, 1776, the Con- 
tinental Congress opened the ports of this country to 
all the world not subject to the king of Great Britain. 
They abolished by that act British custom houses, 
and established no others in their stead. " Absolute 



506 ELEMENTS OF POLITICAL ECONOMY. 

free trade took the place of hoary restrictions ; the 
products of the world could be imported from any 
place in any friendly bottom, and the products of 
American industry in like manner exported, without 
a tax." 1 Many nations have acted similarly in 
similar circumstances ; but no nation, to my knowl- 
edge, on the eve of a great war, ever did as the 
United States did 1861, make it of set purpose more 
difficult to obtain supplies from abroad, and more 
difficult to sell abroad the products of native indus- 
try. It was a clouded thought, hovering in many 
patriotic minds, that what they knew would be im- 
mediately and immensely beneficial to some of their 
constituents would not after all be very harmful to 
the country at large, that carried through the tariff 
of 1861. But it was harmful to the country at 
large in a high degree. Enlightened public opinion 
abroad turned more or less against the country in 
consequence ; the people were obliged to pay nearly 
or quite double on some of the necessaries of life 
what the goods were worth in a free market; some 
of them lost also their best chance of selling a part 
of the products of their industry ; unusual inequality 
of fortune soon appeared among the citizens ; while 
the duties were put so high that nothing like the 
revenue was received from them that might have 
been received. With a much larger revenue in gold, 
a people obtaining their cloths and iron and similar 
goods at something near European or Canadian 
prices, and general industry going forward under its 
natural conditions, the credit of the government 
would not have sunk so low as unfortunately it did 

1 Bancroft, 8th vol., p. 323. 



ON AMERICAN TARIFFS. 507 

sink. The new tariff was not honestly adjusted foi 
purposes of revenue, and while it seemed to concede 
something in its free list to the demand for free 
trade, the concession was largely delusive, since 
many of the articles thus admitted free of duty went 
into manufactures protected by higher duties than 
have ever before been levied in this country. To 
put articles on a free list is of itself no boon to free 
trade ; it depends upon the purpose for which they 
are put there ; whether to benefit the whole people 
or only a few persons at the expense of the whole 
people. In all our recent tariff-legislation there is 
many a snare for the unwary. 

The average range of duties on the entire imports 
from 1862 to 1869, was 34^^ per cent., more than three 
times as much as the average under the Hamilton 
tariff when we were a young nation ; and the aver- 
age on dutiable goods during the same interval was 
41^ per cent., a higher average than the history of 
the country elsewhere presents, except for the brief 
period covered by the tariff of Abominations. 

The original tariff of 1861 was added to at dif- 
ferent times both in articles and in rates, until on 
an actual count of them, the number of distinct 
rates assessed on different articles was 2,317 ; and 
until, in 1868, the following articles actually paid 
the following rates of duty per centum of the value 
of the articles : — common window glass, 49 ; pig 
iron, 55 ; bar iron, 66| ; cast iron pipe and stoves, 
109 ; wood screws, 6Q ; carpenter squares, 82 ; sheet 
lead and pipe, 54; lead pencils, 59|; plain un- 
bleached cottons, 58| ; spool cotton, Q5^', cheap 
gunny cloth, 81^ ; white marble, 57 ; veined mar- 



508 elp:ments of political economy. 

ble, 78f ; salt in bags, 80f ; salt in bulk, 1081; rice 
cleaned, 82^; rice uncleaned, 165:^; scoured wool, 
94 ; washed wool, 121 ; blankets, (average all 
kinds) 81f ; one kind of carpets, 80 ; another kind, 
91; another kind, 156i; Paris white, 285; white 
chalk, 8331.1 The average duty on dutiable goods 
for 1868 was 47.86 per centum. 

But it is said that our present tariff is productive. 
Of course, if the people trade at all, such a tariff will 
be productive; something like half the value of the 
dutiable goods imported goes direct to government ! 
To say that it is productive is only to say that it is 
hard work to destroy the commerce of a great peo- 
ple. The question is, would not a reasonable system 
be even more productive ? At present, the govern- 
ment indeed gets much ; but the people pay a great 
deal more ; inasmuch as the ground-thought of the 
whole system is to raise the price of favored domes- 
tic products through the tariff-taxes on corresponding 
foreign products. Some of these taxes exclude the 
foreign product entirely : in this case, the people pay 
much, and government gets nothing. In other cases, 
the people are made to pay five, and even ten, times 
as much in consequence of a tariff-tax as the govern- 
ment receives from it. Can such a system properly 
be called productive ? In round millions of dollars 
the tariff produced in 1863 and onwards to 1872, as 
follows: — 49, 69, 102, 85, 179, 176, 164, 180, 194, 
206, 216 ; the average for the eleven years was 
$147,000,000. This is per capita^ calling the popu- 
lation 38,000,000, $3.87. The annual average of 
British customs revenue for the same eleven years 

1 Report U. S. Bureau of Statistics, No. 29. 



ON AMEEICAN TARIFFS. 509 

is just about the same per capita; which shows that 
a simple revenue tariff on 17 articles, more or less, 
is as productive per head of population as ours has 
been. Just at present our tariff realizes consider- 
ably more per capita than the British tariff does. 

There have been already three decided reductions 
in the Morrill tariff as it was. The first went into 
effect Jan. 1, 1871, and threw off taxes, as compared 
with 1869, to the extent of $26,054,748 ; but it threw 
them off mainly from the revenue, and not from 
the protective, parts of the tariff: for example, 77 
per cent, of all this reduction was from tea, coffee, 
cocoa, sugar, and molasses ; articles, all the taxes on 
which go to government, and directly raise the price 
of nothing else. Precisely those articles, therefore, 
are the ones to bear a heavy tax. In that general 
reduction of 1871, the average decrease of rate on 
40 articles was 40 per centum ; and the average in- 
crease on 10 articles (all protected articles) was 47| 
per centum. The second reduction in the summer 
of 1872 threw off the duties entirely from tea and 
coffee; and the third reduction under a bill approved 
June 6, 1872, put a large number of previously 
taxed articles upon the free list, reduced decidedly 
the duties on salt and pig iron, and put a general 
reduction of 10 per cent, on most protected articles. 
I find that there are 502 distinct articles dutied in 
the tariff as it now stands, and 972 different rates 
assessed upon the different grades of these articles. 

In reference to our present tariff, and all such 
tariffs, I wish, in conclusion, to make a few general 
observations. 

1. Such duties as these, laid for protection, are 
always laid at the instance, and under the pressure, 



510 ELEMENTS OF POLITICAL ECONOMY. 

of the special interests protected. No legislator, on 
general principles, and without solicitation from in- 
dividuals, ever framed, or would ever have thought 
of framing, such a tariff as ours. This is true even 
of the very moderate protection accorded in the 
Hamilton tariff. It is overwhelmingly true, and at 
every point, of the immoderate protection of the 
Morrill tariff. Distinguished members of the Com- 
mittee of Ways and Means have related to me at 
length the methods pursued to gain the sanction of 
that committee, and thus the ear and the votes of 
Congress. Those methods are scandalous. If they 
were generally understood by the people, there would 
be a speedy end of all such legislation. 

2. A single specimen of the inequalities of which 
our present tariif is full, may be given here by way 
of illustration. Ex uno disce omnes. A supple- 
mental act that went into operation on the 10th 
of August, 1866, provides, for the sake of increas- 
ing the duties, that the costs of transportation, 
shipment, commission, brokerage, and all similar 
charges, be added to the invoice value of imports 
to make up the value on which the duties shall 
be levied. This applies to all dutiable imports, ex- 
cept to long-combing or carpet wools costing" twelve 
cents or less per pound. Why are they excepted ? 
Cannot the carpet manufacturers pay duties as well 
as other people ? They have a very high protective 
duty on their own completed product. They com- 
pel, through Congress, everybody to pay this duty 
on foreign carpets, and carry up the price of their 
own in proportion ; and yet this tariff exempts their 
raw material from an increase of duty applied to all 



ON AMERICAN TARIFFS. 511 

other dutiable goods whatsoever! Ten days before 
this clause went into effect, the Hartford Carpet 
Company declared a semi-annual dividend of 20 per 
cent. ; and its shares were announced as worth $275 
each, with the dividend off. 

y. The condition of ship- building and ship-owning 
in this country is the best practical commentary on 
the influence of protection in general. The system 
is here reduced to its lowest terms. The perfection 
of protection is prohibition. Our navigation laws 
prohibit the buying of foreign ships for the sole pur- 
pose of encouraging the building of domestic ships. 
Notwithstanding their absolute monopoly of the 
market under this law, such are the duties levied for 
protection on the materials that go into ship-building, 
that our ship-builders cannot build ships at a profit. 
It is illegal to buy them, and it is next to impossible 
to build them ; and consequently our foreign mer- 
chant marine has fallen off about one half since 
1860 ; and of nearly 140 steamers regularly plying 
between the ports of the United States and Europe, 
but two, and these just constructed, wear the American 
flag. In 1860, our own ships brought in nearly two 
thirds of our imports ; in 1870, less than one third. 
One half of the commerce of the world is now done 
on British ships : only one fifth on American ships,^ 
Ship-building, mostly for the coastwise trade, in 
which foreigners are not allowed, has revived some- 
what during the past summer of 1873; and two iron 
steamships have been launched from the Delaware. 

4. It is foolishly claimed by some that protective 
duties always shortly lower the prices of protected 

1 Hunt's Merchants'! Year-book for 1870. 



512 ELEMENTS OF POLITICAL ECONOMY. 

articles. If they do, where does the protection come 
in ? Or, what is the motive for levying such duties? 
Or, why has the Onondaga Salt Conripany been 
selling salt for years in Canada at forty per cent, less 
than in Syracuse itself ? Why did the same com- 
pany offer salt to tlie fishermen duty off, and only 
sell it to landsmen duty on ? Is pig-iron, is marble, 
is rubber-webbing, is salt, are wood-screws, are car- 
penters' squares, are coarse blankets, cheaper than in 
1860 ? In a natural course of things they would be 
cheaper: according to the price-lists they are dearer; 
and it is an unnatural and iniquitous force that 
makes them so. 

6. The proper way to deal with protective duties 
is to abolish them instantaneously and simultane- 
ously. The abolition of a tax on industry can do no 
harm to industry. If every tax of every name in all 
the earth could be abolished to-morrow, what harm 
would ensue? Taxes are indeed necessary for the 
support of government, but even when wisely laid 
for that end they are a necessary evil. They take 
just so much out of what would otherwise be the 
gains of exchanges. But protective taxes are the 
worst possible form of taxes, and the only thing to 
do with them is to abolish them. When protective 
duties become numerous, as with us, they become a 
universal burden ; and there are only a few protected 
interests themselves which would not be instantly 
relieved by their universal abolition. To taper off 
in protection is much like a drunkard tapering off in 
his cups. It would indeed be unjust to abolish a 
part of these duties, and leave the rest in force — 
to strike out, for example, the duty on woollens and 



ON AJVlJiJilCAN TARIFfS. 513 

leave the duty on wools, — they should all go by the 
board together. Science and experience alike dem- 
onstrate that this is the best way to do it. Protec- 
tion cannot complain of it, for when did itself ever 
give previous notice to the people that its taxes were 
coming ? Edward Harris paid $58,000 in gold du- 
ties on wool bought, paid for, and on its way to this 
country, when the wool tariff of 1867 came in. If, 
however, ignorance and prejudice hedge the way to 
this simultaneous abolition,-let the worst duties go 
first : those on coal (we have more coal in this coun- 
try than all the world besides), on pig-iron, on lum- 
ber, on salt, on wool, on materials generally. 

6. The changing tone of New England on protec- 
tion is very noticeable. Many of her prominent 
manufacturers are earnest for free trade, and very 
few of the rest have much zeal for the opposite. 
They have found out that they have to pay more 
protection than they get. Exclusive protection of 
one interest is a very different thing from general 
protection of many interests. New England, accord- 
ingly, is swinging back to her old position. Unjust 
discriminations in duties are helping this forward. 
The duty on coal is an abomination in New Eng- 
land ; so is the duty of about 100 per cent, on fine 
wools, while carpet wools come in for about 15 
per cent.; and so is the fact, that of the whole cost 
of producmg a yard of the finer woollens a large 
part has been paid out in duties. The English 
manufacturer, for example, is wholly relieved of 
these duties, and his advantage of four per cent, in 
labor, if it exists, is a mere nothing in comparisoti 
with his immense advantage in the way of free ma- 



514 ELEMENTS OF POLITICAL ECONOMY. 

terials. No wonder our woollen manufacturers are 
goings forward under discouragement. The tariff is 
their foe, and they are becoming a foe to it. The 
shoemakers — the largest single interest in the United 
States next to the farmers — are indignant at the 
tariff taxes on their lastings, webbings, and other 
materials. Much of the present dissatisfaction of 
labor in New England is derivable from causes which 
have their seat in the tariff, and that will ultimately 
feel the force of their opposition. Moreover, Boston 
is anxious to regain its ocean traffic, and an obsta- 
cle to this is the tariff. 

7. The progress that public opinion generally 
throughout the country is making in this matter of 
duties is very cheering. Light is breaking in. The 
people are understanding better than ever before the 
nature of these taxes that are laid, not to produce 
revenue, but to prevent it. They are even asking 
whether Congress has any constitutional right to lay 
taxes for any other purpose than to get money with 
which " to pay the debts, and provide for the com- 
mon defence and general welfare of the United 
States." The issue of present discussions both on 
the constitutionality and the expediency of " protec- 
tive" taxes, is sure to be favorable to commercial 
freedom. The present tariff rests on false principles 
throughout, and cannot, therefore, be permanent. 
To relax commercial systems, and not to restrict 
them, is alone in accordance with the spirit of this 
age. 



ON TAXATION. 515 



CHAPTER XVI. 

ON TAXATION 

If the general views maintained throughout this 
book are conceded to be correct, we shall now reach 
with very little difficulty the true principles of taxa- 
tion. Value resides in services exchanged ; but gov- 
ernment is an essential prerequisite to any general 
and satisfactory exchanges, since it contributes by 
direct efibrt to the security of person and property ; 
and justly claims, therefore, from each citizen a com- 
pensation in return for the services thus rendered to 
him. I do not mean to say that government exists 
solely for the protection of person and property, or 
that all the operations of government are to be 
brought down within the sphere of exchange, for 
government exists as well for the improvement as 
for the protection of society, and many of its high 
functions are moral, to be performed under a lofty 
sense of responsibility to God and to future ages ; 
nor do I mean to say that government has not also 
a deep ground for its existence, in virtue of which 
it may on extraordinary occasions demand all the 
property of all, and even the lives of some, of its 
citizens ; but I do mean to say that, whatever may 
be conceded as the ultimate ground of government, 
the matter of taxation, by which government is out- 



516 ELEMENTS OF POLITICAL ECONOMY. 

wardly and ordinarily supported, and by which it 
takes to itself a part of the gains of every man's 
industry, finds a ready and solid justification in the 
common principles of exchange. If, as far as the 
tax-payer is concerned, the exchange does not seem 
to be voluntary, on a closer analysis it is seen to be 
really voluntary; for in effect the people organize 
government for themselves, and voluntarily support 
it, and there is no government separate from the will 
of the people. The practical rules of taxation at 
any rate, whether the fundamental reasons for it or 
not, must always be found within the principles of 
our science; and while it is admitted that here is 
another point of contact with the regions beyond, 
all that really belongs to it must be vindicated for 
Political Economy. In a very important sense ac- 
cordingly, a tax paid is a reward for a service ren- 
dered. The service which government renders to 
production by its laws, courts, and officers, by the 
force which it is at all times ready to exert in behalf 
of any citizen or the whole society when threatened 
with evil in person or property, is rendered some- 
what on the principle of division of labor, one set 
of agents devoting themselves to that work ; and, 
notwithstanding some crying abuses of authority 
which no constitution or public virtue have yet been 
found adequate wholly to avert, is rendered on the 
whole economically and satisfactorily. Taxes, there- 
fore, demanded of citizens by a lawful government 
which tolerably performs its functions, are legitimate 
and just on principles of exchange alone. 

The question now arises, in what proportions 
ought the citizens to contribute to the fund neces- 
sary to be raised by taxation ? 



ON TAXATION. 517 

The usual answer has been, that a man should be 
taxed according to his property. But what is prop- 
erty ? No word has received a greater variety of 
definitions, or is less settled in definite meaning in 
the minds of men. The lawyers make a distinction 
between real property and personal property ; and 
the law of the United States formerly, and of Mas- 
sachusetts now, though a man have neither real 
estate nor movables, yet taxes him on his income, 
on the rewards of his daily industry, regarding that 
as a species of property. And this too is just; be- 
cause, as I think, the ultimate idea of property is the 
power and right to render services in exchange. 
Robinson Crusoe, while solitary upon his island, did 
not and could not have property, in the true sense 
of that word. It is not the fact of appropriation that 
makes anything property ; it is not the fact that a 
man has made it or transformed it, that makes any- 
thing property ; it is not the fact that a man may 
rightfully give it away, that makes anything prop- 
erty ; but it is the fact that a man has something, no 
matter what it is, for which something else may be 
obtained in exchange, that makes that something 
property, and gives government the right to tax it. 
In other words, property consists in values, in a pur- 
chasing-power, and not in possession, or in appropri- 
ation, or in the esteem in which a man holds any- 
thing he has as long as it is his own. The test of 
property is a sale ; that which will bring something 
when exposed for exchange is property ; that which 
will bring nothing, either never was, or has now 
ceased to be, distinctively property. This view may 
not seem to be as novel as it is, or it may be preju- 



518 ELEMENTS OF POLITICAL ECONOMY. 

diced by its very novelty, but at any rate it carries 
along with it that strongest of the criteria of truth, 
that it simplifies and illumines a confused section of 
the field of human thinking ; and at the same time 
justifies a practice which governments have reached, 
as it Yv-ere through instinct, the practice, namely, of 
taxing men who have neither real estate nor chattels, 
on their incomes from industry. 

To the general question, then, in what proportions 
shall the citizens contribute in taxes to the support 
of government, the general answer comes, that they 
ought to contribute in proportion to the gains of their 
exchanges, of whatever kind they may be. No man 
ever did, no man ever can, pay his taxes, gifts aside, 
except out of the gains of some exchanges which he 
has actually made ; and as the gains are the only 
possible source, so they would seem to be the best 
possible measure, of his taxes. Even the man who 
lives on the interest of his money must make an 
exchange in order to get his interest, the wages of 
personal and professional services are the result of 
exchanges, and men can realize nothing from their 
farms or their foundries except as they sell either 
them or their products. The farm, the foundry, the 
mill, the railroad, the real estate of every name ; per- 
sonal property of every kind ; and personal acquire- 
ments and efforts of all descriptions, best appear, for 
the purposes of taxation, through the gains realized 
by means of them. If, for any reason, any of these 
become unproductive, taxes should cease to be de- 
rived from them ; indeed, must cease to be derived 
from them, because their owners can no longer pay 
by virtue of them. It may be objected, that lands, 



ON TAXATION. 519 

for example, jDresently unproductive, may be held 
untaxed under this principle, held for the sake of a 
prospective rise of price. Very well; when they are 
sold at a profit, let the owner be taxed on that profit : 
it will be time enough then, especially as men do 
not like to hold unproductive forms of property. It 
may also be objected, that, under this principle, 
wages, the result of personal and professional exer- 
tion, would be taxed just the same as profits and 
rents, the result of previously accumulated property. 
Very well ; they ought to be so taxed. Can any- 
body give a solid reason why they ought not to be 
so taxed ? One may say, that a professional man 
earning a large income, on which taxes are paid the 
same as on a similar income of a land-proprietor, 
dying, leaves to his children no further means of 
earning, while the land-proprietor, dying, does leave 
such means. Granted ; but the land income con- 
tinues to pay taxes, while that professional income 
does not! Other members of the profession will do 
the business which the former one would have done 
had he lived, and they will pay taxes on the income 
from it. What a man transmits to his children, 
whether a great name or a great estate, has nothing 
to do, as I take it, with the amount of taxes that he 
ought to pay while he lives. There is an illusion 
about land and realized property that needs to be 
dissipated before men will understand clearly the 
whole matter of taxation. Without constant watch- 
fulness and foresight, without constant efforts in im- 
provements and repairs, almost every form of realized 
property will rapidly deteriorate and become unpro- 
ductive. Land even in Great Britain, where land is 



520 ELEMENTS OF POLITICAL ECONOMY. 

scarce, is only worth about twenty-five years rent ; 
and without the exercise of inteiiigence and will 
property ceases to be. Properly has its birth in ser- 
vices exchanged; services exchanged give rise to 
gains ; taxes can only be paid out of these gains ; 
they ought to be proportioned to the amount of these 
gains without any reference to the class of exchanges 
■producing them; while the right to tax on the part of 
the government is connected luith a service rendered 
by government, and both groivs out of and is limited 
by the right to exchange on the part of the citizens. 
These considerations, though they may exclude the 
propriety of a poll-tax, are consistent with most 
other forms of taxation, and give unity to them. 

If, then, taxes are to be laid on services, thus sub- 
tracting a portion from the gains which accompany 
them, the question now arises in what way are they 
to be laid ? They are commonly divided into two 
classes, direct and indirect. A direct tax is levied 
on the very persons who are expected themselves to 
pay it ; an indirect tax is demanded from one person 
in the expectation that he will pay it provisionally, 
but will indemnify himself in the higher price which 
he will receive from the ultimate consumer. Thus 
an income tax is direct, while duties laid on imported 
goods are indirect. There has been a great amount 
of discussion on the point whether direct or indirect 
taxation be the more eligible form ; but the reader 
of penetration will perceive that there is not at bot- 
tom any very radical difference between them ; each 
is alike a tax on actual or possible exchanges, with 
this main difference, that men pay indirect taxes as 
a part of the price of the goods they buy, without 



ON TAXATION. 521 

thinking perhaps that it is a tax they are paying, and 
consequently without any of the repugnance that is 
sometimes felt towards a tax-gatherer who comes 
with an unwelcome demand. Thus indirect taxes 
are conveniently and economically collected. Espe- 
cially is this true of impost duties ; since one set of 
custom-house officers collect easily and at once the 
government tax which is ultimately paid by con- 
sumers all over the country. The taxes, by stamps, 
on banks, liquors, tobacco, railroad, insurance, and 
gas companies, levied by the present United States 
internal revenue law, are indirect taxes, whereby the 
government gets in a lump what is afterwards dis- 
tributed over many subordinate exchanges. The 
countervailing disadvantage of indirect taxation, 
however, is, that the price of the commodity is usually 
enhanced to an extent much beyond the amount of 
the tax, partly because it is a cover under which 
dealers may put an unreasonable demand, and partly 
because the tax, having to be advanced over and 
over again by the intermediate dealers, profits rapidly 
accumulate as an element of the price. 

Direct taxes are laid either on income or expendi- 
ture. An income tax, if the exact amount of income 
could in all cases be ascertained, would be a perfectly 
unexceptionable form of taxation. The only sources 
of income are three : wages, profits, rents. I do not 
think that gifts are legitimately taxable ; they lie out- 
side the field of exchange; they spring from sympa- 
thy, from benevolence, from duty ; and while ex- 
change must claim all that fairly belongs to it, it 
must be careful not to throw discouragements into 
the adjacent but distinct field of morals. Hence, it 



522 ELEMENTS OF POLITICAL ECONOMY 

may well be questioned whether legacies, bequeath- 
ments, gifts to charitable and educational institu- 
tions, and gifts to individuals proceeding from friend- 
ship, gratitude, or other such impulse, are properly 
subject to taxation. The property is taxable in the 
hands of the donor, and may be in the hands of the 
recipient, but the passage from one to the other ought 
to be unobstructed by a tax. Gifts then excepted, 
and plunder, which is out of the question, the sources 
of income are few and simple, and there is no great 
difficulty in every man's ascertaining about what his 
annual income is. Because this income, exactly 
ascertained, exactly measures the gains of his ex- 
changes for that year, a tax upon that income is the 
fairest of all possible forms of taxation, and might, 
I think, be made with advantage, in time, to super- 
sede all other forms. The late national income tax 
was new in this country, and for certain reasons not 
inherent in the nature of the tax became unpopular 
in influential quarters, and was discontinued ; but 
the English have found their income tax to be for 
more than thirty years the most uniform, unfailing, 
expansive, and responsive to control of all their fiscal 
expedients. Their rate has varied from four to six- 
teen pence to the pound of income. In 1857, it 
realized |80,255,000. In 1866, our own national 
income tax realized $60,894,135. The Germans, 
too, are now applying an income tax as one of their 
sources of revenue. 

Besides the complete harmony of an income tax 
with the general principles of taxation, as already 
unfolded, it has a grand advantage over all other 
forms of taxation in that it has no tendency to dis- 



ON TAXATION. 523 

turh prices. Were there no taxation except on in- 
comes, and were the incomes rightly rendered, the 
prices of everything would be just as if there were 
no taxes. Taxation would then be like the atmos- 
phere, pressing equally on all points and consciously 
on none. It is through tricks wrought on prices that 
the greatest injustice is done and suffered in this 
country at present ; the depreciated currency, for 
example, raises some prices and not others, and 
some prices before others, and thus distributes its 
mischiefs unequally; the "protective" tariff-taxes 
play fantastic tricks with prices, raising some and 
depressing others, thus working monstrous injustice 
on a great scale ; and almost all forms of taxation 
become unequal and unjust through their diverse 
action on prices. But a universal income tax, prop- 
erly levied and fully responded to by the payers, 
would have no influence at all upon prices, could 
by no possibility work essential injustice, and would 
be certain to be very productive. 

Another great advantage of an income tax in 
such a country as this would be, that all men would 
keep accounts, more orderly methods of business 
would prevail, men would know better where they 
stand themselves and whom of others to trust, fail- 
ures would be less frequent, and everything would 
be more known and above-board. 

In this country, where taxes have to be paid, first 
to the local municipality, then to the state, and last 
to the nation, income taxes, were all others abol- 
ished, would have this immense advantage, that the 
municipality might ascertain the incomes once for 
all, the state and the nation merely collecting an 



524 ELEMENTS OF POLITICAL ECONOMY. 

additional per cent, for themselves ; or better still, 
by amicable arrangement, neither party yielding its 
inherent right to tax, one set of officials might ascer- 
tain and collect the tax for all three governments 
once for all. An objection has been raised from the 
publicity resulting from an income tax. This is no 
objection at all, inasmuch as every man has a right 
to know that his neighbors are contributing to sup- 
port the government joro rata with himself. In bear- 
ing up the burden of government all citizens are 
copartners, and in this view each has a right to de- 
mand a look into the books of the others. Another 
objection has been raised, that men will not give in 
a true return of their income. Ah ! but they can be 
made to do so, as the forms are perfected, as fraudu- 
lent returns are promptly punished by additional 
assessment and collection, and as the memory and 
conscience of the payers are quickened by the action 
of a healthful public opinion brought to bear through 
the annual publication of the list of their returns. 
Men are not so isolated from each other as that a 
man's neighbors do not know pretty, well the gen- 
eral amount of his income. There is the additional 
security of an oath, of the fear of punishment, and 
of the wish to stand well with one's class. At the 
worst, it may be said, that evasions and fraud ac- 
company also all other forms of taxation. No fair 
experiment has yet been made in this country with 
an income tax ; special reasons made the late law 
obnoxious ; but if tlie system were permanently es- 
tablished in lieu of all others, the practical difficul- 
ties under it would grow less and less every year. 
It may be long before we shall ever come to this ; 



ON TAXATION. 525 

but the truth remains that income taxes are the just- 
est of taxes. It is incumbent on me, however, to 
give the principles and rules relating to the inferior 
and current methods of taxation. 

Besides income taxes, other direct taxes are on ex- 
penditure of some special kinds, such as those on 
horses, carriages, watches, plate, and so on, kept for 
personal use. As the difficulty of a tax on a person's 
whole expenditure is much greater than one on his 
whole income, inasmuch as the items are more nu- 
merous and more diffused, it is only attempted to lay 
a few taxes on some peculiar items of expenditure, 
such as those above mentioned ; but as these do not 
reach all persons with any degree of equality, they 
are so far forth objectionable. A house-tax, levied 
on the occupier, and not on the owner unless he be 
at the same time the occupier, would be a direct tax 
on expenditure every way unobjectionable.^ Taking 
society at large, the house a man lives in and its 
furniture are probably the most accurate index attain- 
able of the size of his general expenditures. They 
are open to observation and current remark ; they are 
that on which persons rely more perhaps than on 
anything else external for their consideration and 
station in life ; the tax could be assessed with very 
little trouble on the part of the assessor; and it is 
well worthy the attention of our national legislature, 
whether such a tax, if more taxes should be needed, 
would not be more equal and more easy of collection 
than any others now open ; or whether it might not 
with advantage take the place of some of the com- 
plicated and objectionable taxes now laid. Direct 

iMill, chap. IIL, book 5. 



526 ELEMENTS OF POLITICAL ECONOMY. 

taxes have this general advantage over indirect, that 
they bring the people into more immediate contact 
with the government that lays the taxes, and subject 
it to a quicker supervision and more effectual curb, 
whenever its expenditures grow larger than the peo- 
ple think it desirable to incur; they have this general 
disadvantage over indirect taxes, especially over im- 
posts, that the number of officials required to assess 
and collect them is much larger, thus swallowing up 
a part of the proceeds of the taxes, with this liabil- 
ity also of bringing the people into an attitude of 
hostility to the government and to its contemplated 
expenditures. But whether the taxes be direct or 
indirect, or whatever be their form, except it be a poll- 
tax, which is questionable at best, they are laid upon 
exchanges, and are designed to withdraw for the use 
of the government a part of the gains of exchanges. 
From this point of view, which gives unity to the 
whole field of taxation, some practical hints may 
usefully conclude this discussion and this volume. 

(1.) There is every opportunity in this country to 
try experiments in taxation, and to reach through 
experience the best modes, since the states establish 
their own systems independently of any national 
action. There is consequently great diversity of 
methods in different localities and under the differ- 
ent governments. The nation raises its revenue 
mainly through a tariff, subordinately through an 
excise, both indirect taxation. Most of the states 
raise their revenue by direct taxes upon land or 
other property, though Pennsylvania has recently 
tried with gratifying results the expedient of an in- 
direct tax on corporations in lieu of her former direct 



ON TAXATION. 527 

taxes. It may possibly be, considering the complex 
character of our government — the wheels within the 
wheel — that a combination of different taxes, indi- 
rect for the nation and direct for the states, may reach 
a rough result of justice. But in order that it may 
do this even approximately, there must be more sim- 
plicity in each method, and a more studied harmony 
between them, than has been hitherto attempted. 
Taxes must be seen to taxes, and viewed with a 
comprehensive reference to other taxes falling upon 
the same persons, before anything like a system of 
taxation can exist for the United States. 

(2.) If direct taxes, other than an income tax, 
be levied, it is very clear that credits are a legiti- 
mate subject of taxation. Whatever is bought and 
sold is properly enough taxed, if the needs of the 
government require it, and if such taxation would 
be productive and not too unequal. As values 
always spring from the action of individuals, so 
the incidence of taxes is upon persons rather than 
upon things ; and the question is what can a man 
sell, or what has he already sold, on the gains of 
which sale the government may lay some claim ? 
If I have a mortgage on my neighbor's farm, I can 
sell it at any time to a third party ; it pays me in- 
terest ad interim, and 1 can collect it at maturity. 
Government therefore properly taxes me for that 
credit in my possession. It is a part of ray property. 
The holders of the government bonds occupy an 
economical position exactly similar. They have a 
lien on the national property and income. The 
credits they hold are vendible commodities. They 
are a paper bearing interest. They can be collected 



528 ELEMENTS OF POLITICAL ECONOMY. 

at maturity. They are indeed exempted bylaw from 
municipal and State taxation. That was a legitimate 
inducement held out to everybody alike to invest in 
the bonds. But there is no reason why the nation, 
having withdrawn them from town and State taxa- 
tion, should not itself all the more subject them to 
their fair share of the national burdens. The income 
derived from them should be taxed as soon as any 
other income is. It is no longer any ground of merit, 
even if it ever has been, for persons to buy the gov- 
ernment debt. It is a mercantile transaction, and 
should be so considered in relation to taxes. So of 
other mercantile credits. They are taxable. 

(3.) Taxes in general, in order to be most pro- 
ductive in the long run, as well as discourage as little 
as possible the exchanges which would otherwise go 
forward, ought to be low r-elatively to the amount of 
values exchangeable. A high tax not infrequently 
stops exchanges in the taxed articles altogether, and 
of course the tax then realizes nothing to the govern- 
ment. As the only motive to an exchange is the 
gain of it, the exchange ceases whenever the govern- 
ment cuts so deeply into the gain as to leave little 
margin to the exchangers. The greater the gain left 
to the parties, after the tax is abstracted, the more 
numerous will the exchanges become, and the greater 
the number of times will the tax fall into the coffers 
of the government. In almost all articles, consump- 
tion increases from a lowered price in even a greater 
ratio than the diminution of the rate of tax ; so that 
the interests of consumers and of the revenue are 
not antagonistic but harmonious. On articles of 
luxury and ostentation, and on those, such as liquors 



ON TAXATION. 529 

and tobaccos, whose moral effects are clearly ques- 
tionable, very high taxes may properly enough be 
laid, because their incidence will hardly tend to di- 
minish consumption, and it would scarcely be to be re- 
gretted if it did ; but with this exception, duties and 
taxes should be levied at a low rate per cent, as well 
for the interest of revenue as of consumers. It is to 
be added, however, that the taxes even on these arti- 
cles may be too high to meet either a revenue or a 
moral purpose. The internal tax of two dollars a 
gallon upon distilled spirits was of this character. 
Experience has demonstrated that a less tax will pro- 
duce more revenue, and the drinking of whiskey, bad 
as that is, is less culpable than the endless frauds on 
the government provoked by the high tax. 

(4.) Duties and taxes should be simple, and their 
amount easily calculable by the payer beforehand. 
The complication of specific with ad valorem duties is 
a decided objection to the present tariff. The latter 
is a duty of so much per cent, on the invoiced or ap- 
praised value of the goods : the former is a duty of so 
many cents or dollars on the pound, yard, gallon, or 
other quantity. There are too many practical diffi- 
culties connected with either form of duty to make 
it proper to combine the two upon the same article. 
To combine them thus is one of the devices of pro- 
tection. On the whole, specific duties are preferable 
to ad valorem because they give less chance to frauds, 
and because importers, and others, can make their 
calculations easier on the basis of them. To be sure, 
this involves that high-priced grades of an article pay 
no higher tax than low-priced grades of the samej 
but this consideration is largely overbalanced by those 

3i 



530 ELEMENTS OF POLITICAL ECONOMY. 

of convenience and productiveness. So far as is pos- 
sible, taxes sliould be levied upon commodities once 
for all, and then an end. The opposite principle of 
taxing commodities every time they change hands 
throws an indefinite burden on exchange, whose 
weight cannot well be calculated beforehand, either by 
the consumer or by the government, through uncer- 
tainty as to the number of transfers. Exchanges in- 
deed are the only legitimate subject of taxation, but 
not every specifi^c and subordinate exchange. An at- 
tempt to tax all sales whatever was followed in Spain, 
and will be followed everywhere, by a sluggish indis- 
position to trade at all. Let the amount of the tax be 
definite, and let everybody be sure that when it is once 
paid government will produce no further claim, and 
industry will go along under heavy taxes better than 
under those nominally lighter to which uncertainty 
as to time or amount attaches. All the more advanced 
governments have been simplifying of late years 
their systems of taxation, and collecting their revenue 
at fewer points, and under more tangible conditions, 
in order to interfere as little as possible with a free 
industry and free exchange. England, for instance, 
has given up a great variety of taxes, and now col- 
lect:? her revenue about as follows: — (customs for 
1872, on seventeen articles, all others admitted free, 
yielded £20,513,583):— 

Customs, 32 per cent. Stamps, 12 per cent. 

Excise, 30 per cent. Post-office, (j per cent. 

Taxes, 16 per cent. Miscellaneous, 4 per cent. 

(5.) Our internal revenue system has been greatly 
simplified and improved by recent legislation. If the 
tariff" could be readjusted on the same principle, little 



ON TAXATION. F31 

would be left to be desired in our tax-system. The 
principle is, relativel}' low taxes on comparatively 
few things. The principle is simple : the problem is 
difficult ; but wonderfully less so, the moment all 
attempts are given up to foster any branch of indus- 
try whatever. Our legislators are not called upon 
to foster any industries. They cannot permanently 
do it, if they try; and they do immense harm, while 
they try. Their duties would be easier, and better 
performed, if they looked solely to the best methods 
of raising' money in such a way as shall least inter- 
fere with what would otherwise be the ongoing of 
exchanges in all directions. Duties that prevent 
importations, and the consequent exportation of 
domestic products in return ; and duties whose direct 
effect is to raise the price of other articles than those 
on which they are levied ; are objectionable, and, for 
the most part, can be dispensed with. In case duties 
are laid on articles, as spirits, which are also produced 
at home, there should be an excise on the home prod- 
uct equivalent to the tariff-tax on the foreign, other- 
wise the people will pay more in consequence of the 
tax than government will get. This subsidiary prin- 
ciple is important. 

(6.) Taxes and duties should be collected by the 
government in as economical a manner as possible, 
that is to say, the money should be kept out of the 
pockets of the people as short a time as possible, 
disbursement following quick upon collection. It is 
poor policy to gather taxes at the beginning of the 
year which will not be disbursed till the end of the 
year. Let the people use their funds till they are 
wanted at the treasury ; and if the taxes do not then 



532 ELEMENTS OF POLITICAL ECONOMY. 

come in as fast as wanted, it is better to issue what 
are called in England exchequer-bills, and in the 
United States certificates of indebtedness, to be re- 
deemed at the end of the year from the proceeds of 
the taxes, than to let the people's money lie idle in 
the treasury. 

(7.) If the necessities of the State require it, gov- 
ernment has the right to demand from all persons 
who are capable of making exchanges, and who do 
make them, something in the form of taxes. But it 
is every way better, when possible, that people of 
very moderate means should be exempted altogether 
from direct taxes ; and the payment of indirect taxes 
is a matter more in their own option, since they are 
at liberty to buy much or little of those commodities 
subjected to an indirect tax. In the State of Massa- 
chusetts, incomes not exceeding $2,000 are exempted 
by the law. If a house-tax should be levied, all houses 
below a certain grade of style and comfort should be 
exempted, and the tax pass up by easy gradations 
from those just taxed to the palatial residences of 
the rich. In the present age of the world, the well-to- 
do citizens of every country are able to bear without 
too great difficulty the burdens of the government ; 
and nothing tests better the degree of civilization 
which a nation has reached than the care and solici- 
tuda it displays for the welfare of its poorer citizens. 

(8.) Who pays the indirect tax? Can the pro- 
ducer throw it wholly upon the consumer ? Can the 
banks, for example, throw their taxes wholly upon 
their customers ? Producers and dealers and bank- 
ers and companies add the tax demanded from them, 
and sometimes more than the tax under color of it, 



ON TAXATION. 533 

to the price of their wares. But it is not true that 
they can always realize the whole of this enhanced 
price. Generally they can, sometimes they cannot. 
If the article be one of necessity, or a luxury that 
has become equivalent to a necessity, and there be 
no other source of supply than the taxed one, then, 
as a rule, the tax falls wholly on the consumer, and 
is a matter of indifference to the producer or dealer. 
But the usual effect of an enhanced price is to lessen 
demand, and if the article is dispensable, or its con- 
sumption can be lessened, or it can be obtained else- 
where, the market will be "sluggish under the tax, 
and producers or dealers will be likely to tempt it by 
lowering prices, in other words, by sharing the tax 
with consumers, and paying that share out of profits. 
This is the principle. Producers and dealers would 
rather the tax were off. Consumers generally, but 
do not always, pay the whole of it. 

(9.) Much has been written, and very little is 
known, about the tendency of taxes to diffuse them- 
selves. By this is meant, that it does not make so 
much difierence upon what or upon whom a tax is 
originally levied, because the tendency of things is 
to diffuse it, that is, to compel others to assist in 
paying the tax. The result of my own reading and 
reflection on this point is the conclusion that taxes 
do not "diffuse themselves" nearly so much as has 
been sometimes supposed; and that, at any rate, it 
is a good deal better to take the taxes from those 
who ought to pay them, than to lay them at ran- 
dom, and then to trust some unknown forces to 
make them afterwards just. It is certain that some 
unjust taxes cannot be diffused ; for example, the 



534 ELEMENTS OF POLITICAL ECONOMY. 

protective tariff-taxes paid by the farmers upon arti- 
cles of necessary consumption. These taxes have 
no tendency to raise the price of the farmers' prod- 
uce, for that is determined by the foreign market, to 
which large parts of the produce are exported. For 
such taxes the farmers cannot reimburse themselves^ 
Taxes that affect no prices are the best of all ; taxes 
that affect prices the least are the next best ; and 
taxes that are designed to affect prices are the very 
worst. 



lE'DICES. 



INDEX TO PERSONS. 



Abraham, 2, 230. 
Adams, J. Q., 40. 
Aristophanes, 276, 278. 
Aristotle, 5, 6, 8, 14, 16, 27. 
Atwater, Prof., 355. 
Augustus, 12. 

Bacon, Lord, 44. 

Bancroft, George, 474, 491, 506. 

Bascom, Prof.. 40, 185. 

Bastiat, 34, 35, 36, 69, 189, 197. 

Beccaria, 37. 

Bentham, 319. 

Benton, 39. 

Biddle, Nicholas, 342. 

Bigelow, E. B., 40. 

Boudinot, 332. 

Bowen, Prof., 40, 41, 209. 

Browne, J. Ross, 452. 

Buchanan, President, 318. 

Buckle, 28. 

Butts, Isaac, 40. 

Calhoun, 39, 341, 438, 499, 500, 502. 

Carey, 40. 41, 51, 106, 151, 169, 
179, 182, 189, 195, 197, 198, 199, 
2.39,421, 426, 444, 446 448. 

Carlyle, 296. 

Cato, 10. 

Chalmers, 137. 

Chase, Secretary, 344. 

Chatham, Lord, 493. 

Chevalier, 36, 444. 

Cheves, Langdon, 342. 

Cicero, 10, 12, 13. 

Clay, 501, 502. 

Cleon, 276. 

Clinton, George, 338. 

Cobden, 444. 

Colbert, 32, 447. 

Columbus, 332. 

Colwell, 40. 

Condillac, 23, 33, 34. 

Constantine, 262. 



Cox, S. S., .39. 

Crusoe, Eobinson, 48, 517. 

Dallas, 341. 
Defoe, Daniel, 479. 
De Quincev, 219. 
Duane, of N. Y., 342. 

Elder, 40. 

Elizabeth, Queen, 17, 113, 114, 279. 

Elliott, E. B., 262, 267. 

Ephron, 2. 

Kryxias, 8, 12. 

Ezekiel, 3. 

Fawcett, Prof. , 30. 
Ferris, J. A., 40. 
"Financier," the, 355. 

Gallatin, 39. 
Garfield, Gen., 39, 360. 
Genovesi, 37. 
George I., 327. 
Gibbon, 115. 
Gladstone, 469, 483. 
Godkin, E. L., 40. 
Godwin, Parke, 40. 
Greeley, 40, 426, 
Grosvenor, Col., 40, 467. 

Hamilco, 3. 

Hamilton, 39, 324, 325, 329, 334, 

336, 337, 338, 497. 
Hankey, 30. 
Hanno, 3. 

Harris, Edward, 573. 
Herodotus, 3, 262. 
Heth, 2. 

Hildreth, Richard, 498. 
Hiram, King, 230. 
Homer, 3. 30. 

Homer, Sidney, 399, 457, 473. 
Hume, 24, 25,"^ 26, 237. 
Huskisson, 30, 483. 



536 



INDICES. 



Jackson, 342, 343, 502. 
James II., 305. 
Jefferson, 299, 328, 329. 
Jevons, Prof., 31. 
Julius CsBsar, 262. 
Justinian, 11, 262. 

Key of Maryland, 318. 
Knight, Charles, 479, 481. 
. Knox, Gen., 337. 

Law, John, 292. 
Lawson, 30. 
Lind, Jenny, 139. 
List, 37. 
Livy, 262. 
Locke, 23, 24, 200. 
Louis XIV., 32. 
Louis XV., 27. 

Macaulay, 275, 305. 

Macleod, 30, 31, 34, 51, 69, 169, 364. 

Martin, Henri, 447. 

Mason and Dixon, 333. 

Matthews, 29, 157. 

McCulloch, J. R., 17, 21, 26, 29, 51, 

69, 82, 189. 
McCulloch, Secretary, 39, 301, 337, 

464. 
McLane, Secretary, 342. 
Mill, J. S., 29, 51, 52, 75, 189, 214, 

525. 
Mirabeau, 32, 295. 
Montague, 280. 
Moran, 40. 

Morris, Robert, 324, 326, 328. 
Moses, 312. 
Mun, Thomas, 18. 
Murillo, 100. 

Nahum, 3. 

Napoleon, 37, 112, 369. 

Newton, 262, 280, 433. 

Opdyke, Geo., 40. 
Orban, M. Frere, 475. 
Orleans, Duke of, 292. 

Paganini, 138. 
Paley, 46. 
Patterson, 30. 
Peel, Sir Robert, 465. 
Pitt, William, 3-3, 307. 
Plato, 5, 7, 262. 
Potter, G. A., 40. 
Pretender, Young, 306. 



Price, Prof. Bonamy, 30, 359. 

Qoesnay, 23, 26, 27, 28, 32. 

Rae, 40. 

Randolph, 337. 

Rau, Prof., 37. 

Raymond, Daniel, 40. 

Reed, S. R., 40. 

Ricardo, 29, 82, 189, 197, 200, 201. 

Rittenhouse, David, 333. 

Robespierre, 298. 

Saetain, 140, 227. 

Say, 25, 34, 51, 126. 

Schreiner, 355. 

Senior, 29, 51, 120, 170, 189. 

Sheffield, Lord, 494. 

Sismondi, 51. 

Smith, Adam, 16, 18, 23, 24, 26, 27, 

29, 35, 74, 82, 118, 129, 132, 141, 

189, 319, 425, 481. 
Smith, E. P., 40. 
Smith, J. Y., 40. 
Socrates, 8. 

Solomon, King, 230, 265. 
Somers, 280. 
Soult, 100. 

Spaulding, E. G., 40. 
Spencer, Herbert, 389. 
Stein, 37. 
Stone, Editor, 40. 
Storch, 51. 
Suetonius, 262. 

Talleyrand, 295. 
Taney, Chief Justice, 343. 
Thiers, 296. 
Thornton, 30. 
Tooke, 101. 
Troughton, 244. 
Tubal-Cain, 172. 
Turgot, 32. 

TJlpian, 11. 

Ure, 137. 

Van BtJREN, 342, 503. 
Van der Maeren, 475. 
Verri, 37. i 

Vethake, 40. ' 

Walker, Amasa, 40, 41, 120, 349, 

360. 
Walker, F. A., 40. 
Walker, Secretary, 39, 503. 



INDICES. 



53T 



Washington, 337. 

Wayland, 40, 47, 120. 

Webster, 39, 139, 402, 437, 500, 501, 

502. 
Wells, D. A., 40, 503. 
Whately, 23, 33, 34, 51, 53. 



White, Horace, 40. 

William and Mary, 280, 305, 481. 

Wood, William, 327. 

Wright, Silas, 39. 

Xenophon, 3, 4. 



INDEX TO LEGISLATION. 



Act of Navigation, 491. 

Act making monopolies void, 114. 

Act of parliament for resumption, 

309. 
Additions to Morrill tariff, 507. 
American laws of coinage, 244. 
Anglo-French commercial treaty, 

472. 
Athenian regulations, 4. 
Athenian duties, 468. 
Austrian coinage, 267. 

Bank act of 1844, 30. — 

Bank of England law of bullion, 252. 
Bank of England bills, 289, 304. 
Bank of North America, 326. 
Bank charter defeated, 340. 
Bank act of 1863, 346. 
Bank law of 1870, 352, 356. 
Banli of Amsterdam, 277. 
Belgian tariffs, 477. 
Bonaparte overthrew custom-houses, 

112. 
Bounties and restrictions, 12. 
Bounties offered by England, 489. 
British act of 1663, 18. 
British tariff at present, 471. 
Bullion report, 30. 

Calhoun tariff, 500. 
Calico laws, 480. 
Census figures, 458. 
Clay tariff, 501. 
Cobden-Chevalier treaty, 444. 
Coinage laws in England and U. S., 

263; 
Colbert's legislation, 448. 
Colonial system, 489. 
Commercial treaty of 1860, 36. 
Compromise tariff, 502. 
Confederation, 496. 
Congress, its printing money, 323. 
Consols of '65, '67, '68, '70, 404. 
Continental bills, 289, 298. 



Continental Congress opened ports, 

505. 
Corn laws, 486, 487. 
Copyrights in U. S., 116. 
Custom duties at Athens, 9. 

Demand notes, 282. 
Depreciation of greenbacks, 246, 
300. 

Earliest modes of trade, 2. 

East India Company's monopoly, 
114. 

Economics and morals in legislation, 
47. 

England forbade colonial manufac- 
tures, 493. 

England bade colonies buy of her, 
492. 

English laws of land, 207. 

English poor-rates, 208. 

English laws of coinage, 243. 

English tariff taxes, 530. 

Exportables affected by law, 466. 

Exports of corn forbidden, 485. 

Federal convention, 497. 

Fetters reimposed, 113. 

Free trade established in England, 

30. 
French government bought a Murillo, 

100. 
French tobacco a monopoly, 114. 
French laws of land, 206. 
French weights and measures, 247. 
French assignats, 289, 295. 
French commercial companies, 294. ' 
French mandats, 297. 

German coinage, 267, 331. 
Government in relation to wages, 

155. 
Government borrowing, 369. 
Greek commercial law, 9. 



538 



INDICES. 



Guild laws, 485. 

Hamilton tariff, 498. 
Homer's measure of value, 3. 

Income tax, England, Germany, U. 

S., 522. 
India Company's charter, 17. 
Internal revenue simplified, 530. 
Irish misgovernment, 156. 

Laws forbidding outflow of coin, 15, 

16. 
Laws under mercantile system, 19, 

20, 476. 
Law's bank, 293. 
"Lawful money," 352. 
Legal restrictions, 148. 
Legal rate of interest, England, 183. 
Legal forms of monev, 249. 
Legal tenders, 282, 357. 
Legal ratios of gold to silver, 333, 

335. 
Legalization of poor mone3^ 164. 
Legislation as affecting prices, 88, 

534. 
Legislation and strikes, 166. 
Legislation of Moses, 302. 
" Liberty " on the coins, 332. 
Lobbying, 461. 
Log-rolling legislation, 332. 

Massachusetts income tax, 532. 
Mass. usury law, 319. 
Mass. bills of credit, 321. 
Mass. redeemed her bills, 322. 
Mass. issued paper money, 322. 
Mass. legislation in 1638, 463. 
Mercantile system, 478. 
Milled and clipped money, 280. 
Mint laws, 288, 291, 329. 
Mint laws, 1786, U. S., 329. 
Mint laws, 1792, U. S., 329, 332. 
Mint laws, 1873, U. S., 333, 335. 
Mistakes in legislation, 65, 86. 
Morrill tariff, 504. 

National Bank bill, 337. 

Navigation laws, 468. 

New national bank bills, 289, 302, 

358. 
" New tenor " law, 324. 

Old silver coinage in England, 278. 
Opium in British India, 114. 
Order in Council, 496. 



Par by recent law, 382. 

Parliament laws against manufac- 
tures, 444. 

Patents in U. S., 116. 

Pennsylvania tax on corporations, 
526. 

Pitt's treaty, 1786, 33. 

Portuguese wines, 479. 

Queen Elizabeth's monopolies, 114. 

Rate of interest in Holland, 183, 221. 
Recoinage of silver, 24. 
Reductions from Morrill tariff, 509. 
Regulating Bank Act of 1844, 310, 

3>8. 
Remission of silk duties, 473. 
Rhode Island usury, 319. 
Roman law, 11. 
Roman taxes and duties, 12. 

Second U. S. Bank, 341, 343. 

Seigniorage on coins, 261. 

Shroud-laws in England, 480. 

Silk-laws, 482. 

Slavery in Greece, 8. 

Slaverj' wrong and ruinous, 46. 

South Carolina credit-scheme, 321. 

State banks, 300. 

State bank bills taxed, 401. 

State tariff-laws, 496. 

Statute book Gt. Britain, 22. 

Tariff of Abominations, 502. 
Tax on sales in Spain, 530. 
Turgot's tax on land, 32. 

U. S. guarantees the bills, 349. 
U. S. dollar, 261. 
U. S. sells land, 194. 

Vexatious interference with indus- 
try, 112. 
Volume of currency, 401. 
Voted, French trade a nuisance, 481. 

Walker tariff, 503. 

Whig tariff, 503. 

Whiskey taxes, 529. 

Wines of France, 479. 

Wood's patent pinchbeck, 327 

Woollens under present legislation, 

461. 
Wool tariff of 1867, 513. 

Zollveeein, 37, 38, 473. 



INDICES. 



539 



INDEX TO DEFINITIONS AND PRINCIPLES. 



Absolute and relative advantage, 

412. 
Abstinence the source of capital, 176. 
Advantages of consols, 404. 
Agreeableness of employments, 141. 
Agricultural products tend to rise, 

133. 
Agriculture under division of labor, 

133. 
Aims and Ends, 1G5. 
Ambiguities in the word wages, 217. 
Analysis of cost of labor, 214. 
Analysis of cost of capital, 220. 
Animals Only for motion, 13G. 
Antagonism between capital and 

labor, 163. 
Approximately equal farms, 204. 
Aristotle's definitions, 6, 7, 8. 
Artificial diversity unprolitable, 446. 
A science defined, 42. 
Association and individuality, 106. 
Attractive power of money, 237. 
Auxiliaries for motion, 136. 
Average of prices, 466. 

Balance of trade, 483. 

Bank balances not cash, 350. 

Bank, bills defined, 370. 

Barter in relation to exchange, 230. 

Basis of a promise, 403. 

Beauty a source of wealth, 472. 

Benefit of exchange mutual, 477. 

Bills of exchange explained, 376. 

Binary system in coinage, 330. 

Blunders in economics demoralize, 
479. 

Book accounts explained, 367. 

Borrowing without interest, 297. 

Broader possible sciences, 54. 

Bullion theory, 14, 15, 10. 

Business now demands less cur- 
rency, 359. 

Buy cheap, sell dear, 494. 

Capital derived and defined, 168. 
Capital distinguished from personal 

powers, 170. 
Capital essential to laborers, 180. 
Capital in relation to wages, 150. 
Capital created by credit, 373. 
Carey's law of distribution, 179. 
Carey's central principles, 41. 
Cash circulation currency, 286. 
Cash credits in Scotland, 391. 



Catalactics, 34. 

Cents and pencil, 64. 

Certainty of forces in Pol. Econ., 
103. 

Cheap money excludes dearer, 334. 

(Jhecks in rise and fall of coin, 259. 

Checks defined, 382. 

Cicero's distinctions, 10. 

Circulating capital, 185. 

Circular letters of credit, 384. 

Clearing-house explained, 383. 

Clergyman's vocation sacred, 146. 

Coin money defined, 288. 

Collateral securities explained, 375. 

Commerce is exchange, 495. 

Commercial crisis, 394. 

"Compete," and its principles, 418. 

Competition the life of trade, 482. 

Condillac's definition, 33. 

Constancy of employments, 144. 

Consumption increases as taxes de- 
crease, 448. 

Consumption correlative to produc- 
tion, 120. 

Consumption, consume, consumei*, 
defined, 119. 

Convertible money tolerable, 285 

Cooperation, 165. 

Copyright principles, 116. 

Cost of carriage, 421. 

Cost of lands, 195. 

Cost of production explained, 210. 

Cost of labor analyzed, 214. 

Cost of capital analyzed, 220. 

Cottons and silks, 409, 423. 

Credits should be taxed, 527. 

Credit-money defined, 288. 

firedit in national bank bills, 350. 

Credit exchanges are sensitive, 364. 

Credit extinguished, 385, 397. 

Custom in relation to wages, 147. 

Debasing the standard, 244. 
Debts and credits defined, 304. 
Deduction defined, 43. 
Definition of first school, 30. 
Definition of third school, 31. 
Definition of money, 285. 
Definitions of the Koman law, 11. 
Definitions of Pol. Econ., 51. 
Demand and supply in wages, 150. 
Demand defined, 96. 
Deposits defined, 372. 
Desires, efforts, sales, factions, 63. 



540 



INDICES. 



Dexterity under division of labor, 

130. 
Diamond illustration, 70. 
Disadvantages in credit, 392. 
Distribution of precious metals, 268. 
Diversity of natural gifts, 105. 
Diversity of advantage, 106. 
Diversity of industry natural, 444. 
Diversity of national gifts, 408. 
Division of labor, 129. 
Division of labor limited, 133. 
Driblets of business done by money, 

360. 
Dwarfing the powers, 131. 

Easiness of employments, 142. 
Economics, 34. 

Economy political or social, 47. 
Economy and morals independent, 

47. 
Elimination of utility from value, 

85. 
English laws of land, 207. 
Equalization of demand and supply, 

99. 
Equation of international demand, 

415. 
Estimations in value, 72. 
Ethics defined, 46. 
Exchange independent of national 

boundaries, 434. 
Exchangeability (Eryxias), 8. 
Exchangeability (Greeks and Eo- 

mans), 12. 
Exemptions from taxes, 532. 
Experience in Pol. Econ., 44. 
Exportables depressed by tariffs, 

467. 

Faith in money easily shaken, 299^ 

Fall of prices, 397. ^ 

Farmers defrauded by high duties, 
467. 

Farmers under taxation, 534. 

Fee simple in lands, 203. 

Feigned cases in Pol. Econ., 44. 

Fixed capital, 186. 

Fluency of gold and silver, 256. 

Foreign trade same in principle as 
domestic, 411. 

Free trade defined, 431. 

Free materials important, 513. 

Free importation best for home pro- 
duction, 474. 

Free lists delusive, 507. 

Free discounts still panics, 398. 



Freedom, association, invention, 109. 
French laws of land, 206. 

Gains in exchange, 50, 105. 

Gains and rights, 424. 

Gains the source and measure of 

taxes, 518, 525. 
General gluts impossible, 126. 
Generalization explained, 44. 
Gifts should not be taxed, 522. 
Give for get, 449. 
Giving distinct from selling, 471. 
Gluts possible in certain services, 

128. 
Go and pay, 367. 

God's gifts in relation to value, 86. 
Gold is the best money, 249. 
Good theory good in practice, 433. 
Government no right to redistribute, 

459. 
Government may act on wages, 155. 
Government cannot create value, 287. 
Govei'nment gets nothing from some 

tariff-taxes, 508. 
Guilds in relation to wages, 148. 

Hamilton's points in 1780, 325. 
High wages not high cost of labor, 

219. 
High duties hostile to credit, 500. 
Hoeing and haying, 65. 
House-tax proper, 525, 532. 
Hume's points, 25, 26. 

Idea of John Law, 293. 
Implements the gift of capital, 137. 
Imports bu}' exports, 434. 
Improvements benefit all, 419. 
Improvements in relation to value, 

125. 
Income taxes best of all, 523. 
Independence, 453. 
Induction defined, 43. 
Industry ceases when unprofitable, 

489. 
Inertia of value, 255. 
Inferior money expels superior, 275. 
Inflation of currency or prices, 218. 
Instincts of men are for freedom, 

505. 
Interest springs from abstinence, 315. 
Invention under division of labor 

130. 
Irish laws of land, 208. 
Irksome work under division of labor, 

131. 



INDICES. 



641 



Irredeemable paper expels coin, 281. 
Irredeemable money bad for labor- 
ers, 402. 

Jealousy of laborers towards em- 
ployers, 166. 
Joint stock companies, 386. 
Journeymen and master, 81. 
Jurisdiction of Pol. Econ., 76. 

Labor defined, 131. 
Labor but moves things, 134. 
Labor a result of expected value, 70. 
Labor not a source of value, 69. 
Laborers essential to capital, 182. 
Land in the law of its value, 189. 
Lands under depreciated currency, 

196. 
Language and its illusions, 79. 
Law of diminishing return from 

lands, 196. 
Law of improvements in agriculture, 

199. 
Law of production, 121, 123. 
Law of population, 157. 
Law of international exchange, 381. 
Law of exportation, 257. 
Law of depreciation, 341. 
Leavings of wages are profits, 184. 
Legal restrictions affect wages, 148. 
Let alone, 167. —•—. 

Life insurance companies, 387. 
Limits of value in efforts, 92. 
Limits of value in desires, 94. 
Limits of credit, 373. 
Locke's distinctions, 23, 24. 
Low duties make large revenues, 430. 
Low wages countries fear others, 459. 
Low taxes best, 529. 

MACHiNEBYin profits and prices, 224. 

Machinery, its effect on wages, 225. 

Malthusianism, 157. 

Man not a machine, 165. 

Manufacturers have to pay duties, 
461. 

Manufacturers- not benefited by pro- 
tection, 439. 

Manufacturing for the product, not 
the process, 441. 

Market rate explained, 97. 

Materials more important than wages, 
458. 

Matter in relation to value, 97. 

Means of livelihood lessened, 132. 

Measures of value, 90. 



Money acts on prices, 395. 
Money, its rise in convenience, 231, 
Money, a generalized agent, 233. 
Money as a medium, 234, 239. 
Money as a measure, 241. 
Monej' an implement, 344. 
Monopolies defined and condemned, 

113. 
Moral sciences defined, 45. 

National debt a mortgage and bur- 
den, 398. 
Natural monopol}', 140. 
No other money but coin, 311. 

Obstacles yield under exchange, 

111. 
Operatives classed, 131. 
Order of occupation in lands, 198. 
Origin of capital, 171. 

Par between England and TJ. S. 

382. 
Par of international exchange, 380. 
Past, present, and future, in values, 

393. 
Pay as you go, 367. 
Pencil and cents, 56. 
Physical labor defined, 135. 
Pins, an illustration, 129. 
Plato's distinctions, 5. 
Points of chief struggle in history, 

117. 
Points and definitions in Bastiat, 35, 

36. 
Pol. Econ. defined, 1. 
Poll-tax doubtful, 520. 
Poor money hostile to laborers, 164. 
Position of Eoman moralists, 10. 
Positions of Adam Smith, 28, 29. 
Power is motion, 137. 
Pressure of special interests, 510. 
Price defined, 87. 

Principles tending to exchange, 45. 
Principles varying wages, 141. 
Principles in cost of labor, 456. 
Principles of taxation, 515, 520. 
Probability of success affects, 146. 
Product, production, producer, 115. 
Promissory explained, 368. 
Property defined, 517. 
Protection defined, 4-32. 
Protection defeats itself, 465. 
Protection tariffs, 428. 
Protection and revenue incompatible, 

429. 



542 



INDICES, 



Protection hurts manufactures, 443. 
Protection is finesse, 460. 
Public opinion affects wages, 156. 
Purchase by exports, cheap purchase, 
418. 

Quantity of gold and silver, 254. 
(Quantity of money required, 240. 
Quesnay's points, 32. 
Quick sales and small profits, 392. 
Quotient in relation to wages, 152. 

Rapidity of circulation, 836. 
Eaw materials approximate the price 

of furnished products, 220. 
Relative cost in trade for gold, 451. 

Releases from debt, 389. 

Remedies for low wages, 153. 
Remuneration of labor, 139. 
Rent of lands, 200. 
Reproduction in capital, 175. 
Revenue tariffs, 427. 
Ricardo's law of rent, 201. 
Right to contract debts, 400. 
Right of exchange, 110. 
Rise of prices under paper money, 

Rise or fall of demand, 98. 
Rise of prices, 396. 
Rising rate of interest sometimes 
useful, 354. 

Savings-banks, 386. 

Self regulation of coins, 261. 

Self-interest enlightened, 470. 

Silks and cottons, 409, 423. 

Silver a good money, 251. 

Simple taxes best, 529. 

Six cases of value, 66, 69. 

Six grounds of superiority in coin, 

261. 
Skill, how developed, 452. 
Smuggling thieves on high duties, 

465. 
Society, an organization, 48. 
Society, a hive of buyers, 104. 
Speculatit)n defined, 394. 
Spirit of monopolists, 115. 
Standard of value, 37. 
Strikes in relation to wages, 158. 
Success through tact and industry, 

464. 
Superintendence, 457. 
Superiority at different points, 407. 
Supply defined, 96. 
Supply as affecting value, 99. 



Supply non-augmentable, 100. 
Suppl}' easily augmentable, 101. 
Supply augmentable with ditficulty, 
101. 

Tailor and blacksmith, 108. 

Tariff defined, 126. 

Tax on sales discourages, 530. 

Taxes should not disturb prices, 
523. 

Taxes diffuse themselves somewhat, 
533. 

Temperance, 457. 

Tendency in inventions to common, 
right, 124. 

Test of men and methods, 406. 

Thing-dollar governs denomination- 
dollar, 290. 

Three kinds of exchangeable things, 
66. 

Time saved in division of labor, 
130 

Trade for gold, 450. 

Trades-unions affect wages, 149. 

Trust affects wages, 145. 

Underselling, 413. 

Uniformity of value in money, 

248. 
Uniform rise or fall of wages, 223. 
Universal coinage, 266. 
Universal law of value, 96. 
Universal rise of prices, 88. 
Usury laws wrong, 312. 
Utility distinguished from value, 

83. 
Utility in lands, 191. 

Value alwavs relative, 53, 61. 

Value in lands, 190. 

Value analyzed, 56. 

Value defined, 66. 

Value of gold in silver variable, 

3S5. 
Values cannot generally rise, 89. 
Verification defined, 43. 
Vicious principle in the bank of 

England, 306. 
Violin-maker an illustration, 138. 

Wages one third of materials, 458. 
Wages best under freedom, 436. 
Wages-fund a dividend, 152. 
War destroys capital, 187. 
Waste of protection, 462. 
Waste of material, 130. 



INDICES. 



543 



"Wealth a bad. scientific term, 52. 
"Wear and tear of coins, 274. 
"Weights and measures (French), 
247. 



"Wholesale and retail, 131. 
"Widest surface, surest source, 486 . 
"Won't buy, can't sell, 443. 
"Worth of coin in exchange, 271. 



